COMMENT: Tables turned
Written by Deborah Ritchie
The Lord Chancellor, David Gauke, this month announced the outcome of the first discount rate review under the new methodology provided for in the Civil Liability Act 2018 – an outcome met with huge disappointment around the insurance industry.
From 5 August 2019, the rate applicable to personal injury lump sum compensation payments will be minus 0.25%. Whilst not a complete surprise, the rate is considered to be at the low end of expectations, may still result in overcompensation to claimants, and, at the same time, may damage insurers’ balance sheets.
Commenting on the decision, head of non-marine underwriting at the Lloyd’s Market Association, David Powell, said the LMA was “very disappointed” with the
result of the first review of the Ogden Rate. “Whilst the change is positive for compensators, such a small movement that retains a negative rate is a severe disappointment and well below the level underwriters were expecting. The new rate will sustain the vast majority of reserving costs that were imposed on the insurance industry when the rate was previously changed from +2.5% to minus 0.75% in 2017. The highly competitive nature of our industry means that reductions in costs will quickly influence premiums. However, this positive but small change is unlikely to lead to substantial price reductions for policyholders.”
Partner at global law firm Clyde & Co, Kate Duffy agreed it was a poor result for insurers. “This news has wiped the smile off the face of the many insurance actuaries still celebrating England’s cricket win... -0.25% is a poor result. Yes, it’s better than the proposed -0.75%, but it remains woefully inadequate. From the industry’s perspective, it tips the odds too much in favour of claimants at the expense of insurance-buying motorists and businesses, who will inevitably have to dig deeper for insurance costs.”
Andrew Hibbert, partner and head of the catastrophic injury team at BLM concurs, voicing his concerns around over-compensation. “I am doubtful that this
new rate removes the risk of over-compensation which the government itself said was significant at the previous rate of -0.75%,” he said. “The more positive aspect
is that the setting of the discount rate should at least remove uncertainties associated with resolving claims and should help bring cases to a close more quickly.”
In potentially better news, Gauke’s statement also referred to a future consultation to explore setting a dual rate – something the LMA’s Powell said the association has long advocated. “We will await this consultation with interest, as this route may be the only prospect in the short-term that could provide some relief to motor and casualty insurance customers now facing sustained pressure on premiums,” he said.
This latest chapter in the Ogden saga is one of a number of dramatic twists in a story that began in November 2010 when the then Lord Chancellor, Kenneth Clarke, agreed to review the discount rate, which had since 2001 been 2.5% – a rate which was considered no longer representative of the rate of return available to claimants when investing their lump sum damages.
Current indications are that the next review will take place within five years,
and in the meantime, new versions of the Ogden tables will soon be available.