Insurers want new laws to ensure the lord chancellor must consult a body of experts before making any future change to the discount rate applied to personal injury compensation payments. But claimant lawyers have urged ministers not to ‘pander’ to insurers protecting their own profits when deciding the fate of critically injured people.
These are the main responses to the government’s consultation on the level of deductions from personal injury awards, the deadline for which passed last week.
Earlier this year lord chancellor Liz Truss delighted claimant groups, and infuriated the insurance lobby, by changing the rate from 2.5% to -0.75%, increasing PI damages awards.
Truss said she was bound by law to link the rate to index-linked government securities and take account of the potential, or lack of it, to invest compensation for an extra return.
The Association of British Insurers (ABI), in its consultation response, stressed its commitment to provide 100% compensation to claimants but said the link to one particular investment asset should be dropped.
Instead, insurers back replacing the current single rate with a ‘stepped’ dual rate to reflect different investment periods. This would provide lower returns for claimants with short-term needs and give higher returns for claimant investing over a longer time.
The ABI says this system is already in place in Ontario, Canada, where for this first 15 years a short-term variable rate applies, updated annually to reflect returns on yields, with a fixed rate of 2.5% applying after 15 years.
The organisation wants a panel of experts, including insurers, claimant lawyer representatives, independent financial advisers and actuarial firms, set up to assist the lord chancellor in setting the rate. This panel would need to be consulted before any new rate was set, but would still have the ultimate decision-making power.
James Dalton, director of general insurance policy at the ABI, said the current methodology for calculating the discount rate is ‘fundamentally flawed’ as it does not reflect how claimants invest damages in practice.
‘Retaining the status quo is not an option – it is essential that the new government changes the framework to ensure we have a system that is fit for purpose for claimants, insurance paying customers and compensators,’ he said.
The Association of Personal Injury Lawyers said ‘frenzied’ insurance industry rhetoric following Truss’s decision was designed to hide that insurers have enjoyed a windfall in recent years.
The rate was left unchanged since 2001 and APIL said victims of serious injuries have gone under-compensated in the intervening years.
The group appeared to back the current system for setting the rate, saying the formula does not require people to invest their compensation in high-risk investments.
‘Make no mistake, this calculation, by definition, only applies to the most severely injured people who may need round the clock care,’ said APIL president Neil Sugarman.
‘Their homes will need special adaptions for wheelchairs and other equipment, and they may never be able to earn a living again. The purpose of insurance is to cover these eventualities. The insurance industry must not be allowed to shirk its responsibilities.’
Due to the general election, it is unclear exactly when the next government will respond to the consultation. Before the poll was called, there was speculation that discount rate reforms could be added to the Prisons and Courts Bill. However, the measure was abandoned when parliament was dissolved.