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Discount rate research ‘could delay decision’

Research for MoJ reveals 'gaps in evidence' in understanding how rate works

23 September 2013

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Research for the Ministry of Justice on the discount rate applied to personal injury awards could lead the government to further delay in making a decision, insurance specialists Kennedys has warned.

The MoJ published two consultation papers on the discount rate, one in August last year, on how the rate should be calculated, and one in February this year, on whether the law should be changed.

The latest research, by the Ipsos Mori Research Institute, found that even a small change in the discount rate could have a "substantial impact" on the number of claims.

Researchers said a "key message" from their work was that claimants were "cautious and risk averse in their investments".

The report went on: "Claimants tended to focus on minimising the risks that they face, rather than seeking opportunities to get higher rates of return.

"Despite being generally unhappy with the rates of return they currently achieve on their investments, they did not think that they would have taken greater risks had their compensation payments been higher."

Researchers said there were "several gaps" in understanding the discount rate. These were the lack of a requirement on solicitors to record when the rate had been used, the lack of data on the financial values of settlements, the lack of information on periodical payments, the small size of the sample of claimants and the fact they were recruited mainly through financial advisers.

The report warned that the car insurance industry may respond to a change in the discount rate by increasing premiums, with a knock-on cost to the public.

Christopher Malla, partner at Kennedys, said he was pleased that the research recognised that even a small reduction in the rate would have a significant impact on public bodies and insurers

"In fact the research concludes by highlighting a significant number of evidence gaps, which may lead the MoJ to further delay a decision on the rate.

"Public bodies and insurers are waiting for clarity on this important issue and we continue to urge the government to maintain one discount rate for all heads of loss. Furthermore, once set, the discount rate should be in place for at least ten years so as to provide stability."

Former justice secretary Ken Clarke announced a review of the discount rate as long ago as 2010, following the threat of a judicial review from APIL.

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