The Government’s proposed Civil Liability Bill has just had its first reading in Parliament. The Bill proposes a new method of calculating the discount rate and ways in which to reduce the number of whiplash claims.
The discount rate
The discount rate is the percentage used to adjust compensation awards for victims of serious personal injury. It is intended to reflect the amount a victim could earn by investing their compensation. In February last year the discount rate was – unexpectedly for many in the industry – cut from 2.5% to minus 0.75%. That effectively meant that the compensation paid out by insurers increased.
The reaction from the industry to the rate cut was dramatic. Promises and a consultation swiftly followed from the Government to at least review the way the discount rate is set. That new methodology is now set out in the Civil Liability Bill.
The proposed text of the Bill is has not been published, so we only have the Ministry of Justice’s announcement to rely on at this stage. The MOJ has described its new methodology for setting the discount rate as “fairer and better“. The ABI has welcomed the proposal. However, the real substance of the Bill is not yet publicly available – so whether both claimants and insurers will agree with the Government’s sentiments remains to be seen. It also remains to be seen exactly what discount rate that new methodology will produce.
The MOJ has noted some features of how the new methodology will work:
- Regular reviews of the discount rate, at least every three years. The first of these reviews will take place within 90 days of the legislation coming into force.
- An “independent expert panel”, chaired by the Government Actuary, to advise the Lord Chancellor on the setting of the rate. Although it seems that the Lord Chancellor will not be bound to follow the panel’s advice, we would express cautious optimism that this would avoid dramatic, unexpected changes in the rate again. However, there is no word on the makeup of the experts on the panel, and whether they might tend to favour claimants over insurers (or vice versa).
- The rate will be set by reference to “low risk” rather than “very low risk” investments. The current framework uses the yield from very low risk investments – gilts – as a proxy for the returns from investing. Setting the rate by reference to other forms of investment as well would seem more realistic and reflect feedback the Government has received from financial advisors.
The Civil Liability Bill also contains proposals intended to cut the number of whiplash claims, which have increased in value by 50% since 2006 to around £2 billion per year, despite decreases in the number of reported accidents. Fixed amounts will be set for compensating whiplash claims (though we do not yet know what the fixed amounts will be, nor how this might interact with the small claims limit). Offering to settle whiplash claims without medical evidence will be banned as well. These proposals follow on from the MOJ’s consultation in November 2016, which we blogged about here.
In short – it could mean a higher discount rate approximately 15 months from now
The Civil Liability Bill only had its first reading in the House of Lords yesterday, and it is yet to be debated. It still has a long way to travel through Parliament. The Government did not announce a timeframe yesterday, but reports are that the Government is hoping to have the legislation in force by April next year. The first review of the discount rate (within 90 days) would then be by July 2019.
The impact of the Bill will clearly depend on the final text. At the moment, we do not know enough to say decisively whether the Bill’s proposals are likely to result in a higher (i.e. less costly) discount rate for insurers. However, it would appear that the Government has taken industry feedback on board. There are grounds to suggest that the new methodology for setting the discount rate will produce a higher discount rate when the time for review comes.