ABI drops discount rate judicial review threat

Dalton: Decision was misguided and incorrect

The Association of British Insurers (ABI) has decided not to launch judicial review proceedings over the previous government’s decision to raise the discount rate, but only to -0.25%.

The decision by then Lord Chancellor David Gauke in July was met with dismay by insurers, who had been releasing reserves in preceding months on the assumption that it would rise from -0.75% to 0% at the very least.

The ABI announced it would consider bringing a judicial review. However, James Dalton, its director of general insurance policy, said in a statement yesterday: “We maintain that the decision by the former Lord Chancellor to set the personal injury discount rate at -0.25% was misguided and incorrect.

“It represented a material departure from the principle of awarding 100% compensation and resulted in higher costs for motor insurers.

“We considered carefully whether to apply for a judicial review of the decision; however, we were mindful of the uncertainty and delay that would have been created in individual personal injury cases as a result and so decided not to proceed.”

At the time of the announcement, ABI director general Huw Evans described it as “a bad outcome for insurance customers and taxpayers that will add costs rather than save customers money”.

He continued: “A negative rate maintains the fiction that a claimant and their representatives will knowingly choose to invest their damages in a way that would guarantee losing them money. This will remain the lowest discount rate in the Western world, leaving England and Wales an international outlier at a time when we need to boost our attraction to international capital.”

The ABI had argued that the accompanying impact assessment published by the Ministry of Justice on the new rate was “misleading and wholly disingenuous” in predicting savings for insurers; the assessment said insurers would save £230-320m as a result of the change.

In a letter to Mr Gauke, Mr Evans argued that it omitted to mention ministerial decisions since 2017 “designed to ensure” that the -0.75% rate was not widely adopted.

This included the ministry’s guidance to the stock market in September 2017 that it expected a new rate to be set at 0-1%.

“This is a material fact because – as is a matter of public record – many large insurance companies used this guidance for their reserving and pricing decisions from this point on, enabling insurance premiums to fall during the passage of the Civil Liability Act and ahead of the setting of a new rate.”

There was also no mention of the earlier statement in February 2017 by the Chancellor of the Exchequer, Philip Hammond, of the government’s intention to “swiftly review” the framework that led to Liz Truss, as Lord Chancellor, setting the -0.75% rate.

“This public statement had the desired effect of ensuring that lawyers did not adopt the -0.75% rate in practice,” Mr Evans said.

As a result, he said, premiums have fallen and the majority of personal injury cases have settled at a rate between 0% and 1%, “as the government intended”.

Mr Evans said this meant the impact assessment was wrong to compare the new rate with the current one and estimate a resulting saving.

“Your department can be in no doubt this is not an accurate reflection of the current market situation because it has worked hard with HM Treasury of the last 2.5 years to ensure it never became so. No such saving exists to be passed onto consumers.”

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