UK govt launches injury claim discount rate consultation

The government on Thursday unveiled its consultation into the how the discount rate for personal injury payouts should be applied in future.

In a written parliamentary statement, Justice Secretary and Lord Chancellor Liz Truss said the consultation would look at whether the rate should be set by an independent body.

She added that it would investigate whether more frequent reviews would improve predictability and certainty for all parties; and whether the methodology – which in effect assumes that claimants would invest only in virtually risk-free index-linked gilts - was “appropriate for the future”.

The 'Ogden rate' was in February cut to -0.75% from 2.5% which the industry said would increase the cost of personal injury claims in England and Wales.

Set at 2.5% since 2001, analysts were expecting it to be reduced to 1% or 1.5%. Truss said the cut reflected the fall in index-inked gilt yields, which are used in the calculation.

The announcement hit insurers in England and the US.

Admiral said it would take a £70m-100m hit on 2016 profits. Direct Line said it would reduce profit before tax by between £215-230m after reinsurance recoveries, though this was not as bad as it had feared. Industry peer Hastings said it would make a one-off £20m charge, while Esure Group said it would not be as badly affected. Novae said it would expect a total hit of around £55m.

At the time, the Association of British Insurers (ABI) said claims costs would soar and make it "inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK".

Truss also called for evidence on how investors in the position of personal injury claimants are likely to invest.

“The consultation document explores what an appropriate investment risk profile could look like for such investors, and what the effect would be of moving from the current virtually risk-free model, to a low-risk model,” she said.

“Whilst my responsibility extends only to England and Wales, the principles and method for setting the rate have read across to all jurisdictions in the UK, and the consultation is produced in partnership with the Scottish government.”

“We must have a justice system that works for all. I fully recognise the impact that the discount rate has, not just on claimants (including some of the most vulnerable in society), but also on defendants in both the public and private sectors, and the further impact this has on consumers’ insurance premiums and taxpayers.”

In February, the Ministry of Justice (MoJ) said when victims of life-changing injuries accept lump sum compensation payments, the actual amount they received was adjusted according to the interest they could expect to earn by investing it.

In finalising the compensation amount, courts apply the discount rate, with the percentage linked in law to returns on the lowest risk investments, typically Index Linked Gilts. The law states that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on this lump sum, often for long periods or the duration of their life.

Compensation awards using the rate should put the claimant in the same financial position had they not been injured, including loss of future earnings and care costs, the MoJ said.

The ABI on Thursday acknowledged the government had moved swiftly, but warned "we need to see this urgency maintained with a firm commitment to legislate in the Prisons & Courts Bill currently before parliament".

"As the only major economy in the world with a negative rate, the UK will face significantly increased insurance and taxpayer costs until the system is reformed and a new fairer rate can be set,” the ABI said.