Representing the UK’s insurance and long-term savings industry | Contact us

ABI launches legal challenge to Lord Chancellor’s decision to review discount rate for personal injury damages

19/12/2016

Judicial Review challenges Government over ‘flawed methodology’

The Association of British Insurers (ABI) today launched a legal challenge of the Lord Chancellor’s decision to review the discount rate for personal injury damages, calling on the Government to complete its consultation and change the methodology before proceeding.  

Without doing so the review will take a flawed approach based on a fundamental misunderstanding of how people invest their compensation, the ABI said.

The discount rate is a tool designed to ensure claimants are not under or over-compensated. It adjusts personal injury damages awards to take into account the return expected when a compensation lump sum is invested.

The Lord Chancellor announced on 7th December that a review of the discount rate would be complete by 31st January 2017. In her statement the Lord Chancellor conceded that any change could have ‘profound financial consequences’. The current discount rate is set at 2.5%.

The UK is an outlier internationally in its reliance on a single measure when determining the discount rate (gross redemption yields of Index-Linked Government Gilts) rather than a formula similar to one used by a real life investor.

Nowhere else in Europe follows this flawed methodology and the ABI says it is critical the Lord Chancellor update it.
 
Director General of the ABI Huw Evans said:

“It is vital that claimants get the compensation they are entitled to, based on a formula that reflects how they are likely to invest it. The discount rate has a significant impact on the amounts paid out by both insurers and public sector bodies like the NHS. This calculation must therefore reflect the type of long-term investment behaviour we know claimants actually use.

“Despite two public consultations over three years ago and convening an expert panel, the Ministry of Justice has not yet shared any findings. Instead they are now trying to rush out a new rate for the first time in 15 years at a time of great uncertainty in the investment markets.

“To proceed in these circumstances is reckless and wrong. Insurers are open to a proper dialogue on how to reform the system but this is not the way to do it.”

Poor process and lack of transparency

The then Lord Chancellor consulted in 2012 on the methodology that should be adopted in setting the discount rate and in 2013 on a review of the legal framework for setting the rate. The ABI responded to these consultations but no response has ever been issued by the Ministry of Justice. This is a breach of Cabinet Office guidelines and promises made at the time.

In 2015 a panel of experts was appointed to consider the responses to the consultations and advise the then Lord Chancellor on the rate review and they reported in January 2016.  That report has not been published either.

On 7th December 2016 the Lord Chancellor announced via RNS that she would review the rate by 31st January 2017. No further information was published and no statement to Parliament was made. There is still no record of this statement on the MoJ website.

What is the discount rate?

The discount rate is a tool that adjusts personal injury damages awards to take into account the return expected when a compensation lump sum is invested and to ensure that claimants are not under or over-compensated.

It has been set at 2.5% since 2001 and governs all compensation awards in England and Wales. In Europe, it is typically between 1% and 4%.

In the past the rate has been based largely on the gross redemption yields of Index-Linked Government Securities (ILGS).  The principle of full compensation, which the ABI entirely accepts, is that injured claimants should neither be under-compensated nor over-compensated. This is no longer served by the linkage to ILGS because the long-term investment behaviour of those compensated is, in practice, very different. The Lord Chancellor needs to conclude the process of finding the right way of achieving the full compensation principle.

- Ends -


Notes for Editors


1.    Enquiries to:
Sarah Cordey            020 7216 7375    Mobile: 07860 189071
Malcolm Tarling        020 7216 7410    Mobile: 07776 147 667
Lauren Gow         020 7216 7327    Mobile: 07889 641702

2.    An ISDN line is available for broadcast

3.    More news and information from the ABI is available on our web site, www.abi.org.uk.
Last updated 19/12/2016