Discount rate - the light at the end of the tunnel
It has been a long road to reform of the personal injury discount rate. The Ministry of Justice first started consulting on the subject in 2012, and it is only now being delivered.
The clock to delivery has now started ticking. The Civil Liability Act 2018 received Royal Assent on 20 December 2018 and, under its provisions, the Lord Chancellor had to start a review of the rate within 90 days. He must then determine the rate within 140 days of the review commencing, meaning that the latest he can set the new rate is 7 August 2019.
The Ministry of Justice started preparing for the review before the Act even received Royal Assent by issuing a call for evidence, which closed on 30 January. Such a proactive step – especially when all other political energy is being dislocated by Brexit – is evidence of the importance the MoJ places on the need to reform.
The rate is almost certain to change from the current minus 0.75%, because the Act alters the way in which it is calculated.
At present, the assumption is that claimants choose ‘very low’ risk investments for their damages, specifically index-linked government stock. This will change to an assumption that claimants will select investments with more risk than a very low level, but less risk than would ordinarily be accepted by a prudent and properly advised individual investor.
Further, the current rate is patently unsustainable. It was set in February 2017 by the then Lord Chancellor, Liz Truss, to reflect the fact that investments in government stock were resulting in a net loss relative to inflation. That is not an outcome expected by even the most risk-averse investor.
Applying the revised assumption should then relieve some of the current pressure on insurers , who have had to adjust their reserves significantly since 2017.
The MoJ’s determination to push ahead with the Act is reflected by the fact that it wrote the timeline into law will not allow for the wriggle room sometimes seen with government deadlines, which has provided reassurance to the market.
Given the impact of the current rate – and the importance of the issue – there is every chance that the Lord Chancellor will not wait until 7 August to come to his conclusion. Indeed, many would urge the MoJ to move swiftly, otherwise the uncertainty will be particularly unhelpful for insurers as they hit their reporting periods.
Ahead of that conclusion, it is expected some compensators will adopt a less cautious approach to their reserving for 2019, but many will retain a more prudent stance until the new rate becomes a reality.
Meanwhile, Scotland is going in a slightly different direction as it reviews the method for calculating the rate. The Damages (Investment Returns and Periodical Payments) (Scotland) Bill sets out a framework for setting the rate based on a ‘notional investment portfolio’ for an investor who takes advice and invests in a ‘cautious’ portfolio over a 30-year period.
The rate would be assessed by the Government Actuary, rather than an independent panel as south of the border. Ministers estimate that, if this formula was currently applied, it would set a discount rate in Scotland of 0%.
The bill has recently completed the second stage of the legislative process, extending the review cycle from three years to five years in line with England and Wales. Stage three is later this month.
The setting the discount rate has not been a quick or easy process. many in the industry have spent considerable time and resource digging deep into the issues and coming up with ideas that were workable as well as fair to both claimant and defendant. The sooner there is a new rate and certainty for at least the next five years – until the first review in 2024 – the better.
This article was first published by Insurance Post on 15 February 2019.