A discount too far for insurers

It has been a chastening time for the Association of British Insurers (ABI). For the first time in many years it has not got its own way when it comes to personal injury reform. The decision by the then Lord Chancellor David Gauke to raise the discount rate by half a percentage point (from -0.75 per cent to -0.25 per cent) was certainly unexpected. Most lawyers assumed the rate would be a positive figure, set with more of an eye to the public purse and the insurance lobby than to claimants’ needs. Insurers were confidently expecting the new rate would be 0 per cent at the very least – the basis on which many have been calculating their reserves. The ABI is complaining that insurers have been caught off guard in the wake of Gauke’s decision, having been told to prepare for a higher rate than the one announced. Insurers also say motor premiums have fallen over the last couple of years in expectation of a higher rate, and government estimates of savings to insurers of up to £320m as a result of the new rate are wrong as a result. But insurance company profits, reserving policies and lower premiums must not trump the needs of severely injured claimants who, through no choice of their own, must rely on receiving sufficient compensation to last the rest of their lives.

The statement of reasons published by Gauke on 15 July 2019 said advice from the government actuary was that a rate of 0.25 per cent would mean a 50:50 risk of claimants being under- or over-compensated. He said: “I have regarded that conclusion as a starting point for my determination rather than an end point… I consider that a rate of plus 0.25 per cent would run too high a risk of under-compensating claimants.” Having considered the data for a 0 per cent rate he then applied “further prudence” and came to rest at a rate of -0.25 per cent. At this rate, he said the average claimant “has approximately a two-thirds chance of receiving full compensation and a 78 per cent chance of receiving at least 90 per cent compensation. Such a claimant is approximately twice as likely to be overcompensated as undercompensated and is approximately four times as likely to receive at least 90 per cent compensation as they are to be under-compensated by more than 10 per cent. I consider that this leaves a reasonable additional margin of prudence which reflects the sensitivities of the rate to the baseline assumptions”.

While the rate is indeed lower than most expected, its effect on claimants will be to reduce their compensation and there will be significant under-compensation for many. This will fall heaviest on the most seriously injured individuals and their families, particularly those with very high care costs where a periodical payment order is either unavailable or inadvisable. Those of us who advise claimants will have to grapple with the true consequence of the government actuary’s “baseline assumptions”, the majority of which fell in favour of the paying party. They include assumptions about investment behaviour and inflation, the cost of investment fees and taxes (for which the evidence to support a 0.75 per cent adjustment was scant at best), and predictions about the likely returns from a “low risk” portfolio of investments. Investing damages for an injured person is difficult at the best of times, but given current interest rates – which are likely to fall further in the event of a no-deal Brexit – and the assumptions relied on in setting the new rate, the amount of claimants who end up undercompensated look set to far exceed the estimates relied on by Gauke.

However, the decision should be seen against the backdrop of what is shortly likely to be an identical decision in Scotland; and hopefully it will influence politicians in Northern Ireland where claimants are still stuck, very unfairly, with a 2.5 per cent rate. If a more accurate rate is to be set when the rate next comes up for review in five years’ time, we need parity across the whole UK – and better data with which to challenge the government actuary’s assumptions