VIEW: On the latest change to the personal injury discount rate
Written by Graeme Trudgill, executive director, BIBA
Fair's fair, or is it?
The principle of 100% compensation for personal injury claims is something that BIBA, along with others in the insurance sector, have been campaigning for since the Ogden rate – the multiplier used by insurers to calculate payments was reduced to -0.75% in 2017.
Nobody wants to skimp on the compensation payment to those that suffer a catastrophic injury as a result of someone else’s negligence, but neither is it fair to be over compensated; the principle of indemnity must continue to apply.
The sector welcomed The Civil Liability Act which sought to avoid problems caused by swings in the rate. The Ministry of Justice wanted the means of calculating the rate to “put claimants in the same financial position they would have been in had they not been injured – they should receive neither more nor less than full compensation.”
There was expectation that the measures in the Act would result in a more measured approach to the setting of the rate through:
• setting the rate with reference to ‘low risk’ rather than ‘very low risk’ investments, better reflecting evidence of the actual investment habits of claimants;
• establishing a regular review of the rate, the first within 90 days of the legislation coming into force and at least every three years thereafter; and
• establishing an independent expert panel chaired by the Government Actuary to advise the Lord Chancellor on the setting of the rate.
We have now seen the first review which was received with some consternation in the sector when the Lord Chancellor set the new rate at -0.25% from 5 August 2019.
Although BIBA believes this was a small step in the right direction but it is actually nowhere near enough and the move has already drawn public predictions from some insures of negative impacts on their reserves and potentially their bottom line.
In his reasoning for setting the new rate, the Lord Chancellor said that he took in to account the Wells vs Wells premise that claimants should neither be under, nor over compensated. However, it is actually a rate of plus 0.25% that would have achieved this. The Government Actuary’s advice to the Lord Chancellor showed that a multiplier of plus 0.25 brings a 50/50 chance of the claimant being under or over compensated.
At only -0.25% there is a much lower chance of claimants being under-compensated, but a much higher chance of them being over-compensated. The premise that a significant number of low-risk investments will lose money is incongruous with market practice.
The public and policyholders may continue to bear the brunt of this development. Compared to early 2017, claims awards are likely to remain higher with the resultant unintended consequences affecting premiums and adequacy of the levels of liability cover. This in turn means that brokers will have to help their clients assess their liability exposures and potentially rebroke risks that have been affected.