The Association of British Insurers (ABI) has urged its members to “keep up the pressure” on the government over the discount rate, suggesting that changing it could fill the £2bn hole left in the nation’s finances by yesterday’s u-turn over raising National Insurance contributions for the self-employed.
James Dalton, the ABI’s director of general insurance policy at the Association of British Insurers, said: “The government can fill the void in its accounts from today’s NICs u-turn by bringing in a more sensible discount rate used to calculate personal injury compensation.
“As last week’s Budget confirmed, the ill-judged decision to reduce the discount rate to -0.75% will lead to a massive £6bn hit on the NHS, so this seems an obvious course of action to take”.
In an article earlier this week for Insurance Post magazine, Mr Dalton said the new rate was the result of “muddled thinking, poor legal advice and intransigence” at the Ministry of Justice.
“In particular, despite Secretary of State for Justice Liz Truss stating that -0.75% was the only legally acceptable rate that could be set, she had a range of options under the Damages Act 1996.
“By announcing a new rate and then quickly agreeing to a consultation exercise as to how the rate should be set, she implicitly recognises that the formula she has used for setting the rate is wrong. Otherwise why consult, especially when the same issues have been live and unanswered since consultations were run in 2012 and 2013?
“A discount rate that assumes that claimants invest 100% of their compensation in index-linked government securities bears no resemblance to what prudent claimants do in practice, and ignores the most basic of investment advice not to put all eggs into one basket.”
Mr Dalton revealed that insurers pressed three key points on Chancellor Philip Hammond when he met with them in the wake of Ms Truss’s decision:
First, that discount rates operate in this way across the world and the UK is the only major developed country to have a negative rate.
Second, that the decision to use a “broken” formula to set the rate has “raised serious questions in the financial capitals of the world about the attractiveness of the UK as a place to do business”.
Finally, given the size of the cost increase, that there would be “an immediate and ongoing impact on insurance customers”, especially higher risk groups like young and older drivers.
Mr Dalton wrote: “We need certainty on a formula that: delivers full and fair compensation to claimants; takes account of how claimants actually invest their money; recognises that claimants generally have a low-risk not no-risk appetite, and that periodical payment orders are available to them if they want a ‘no-risk’ option; is not tied to only one class of investment; and is set through an open process with proper consultation of experts, including both insurers and personal injury lawyers.”
He said this could be included in the Prison and Courts Bill, but with parliamentary time likely to come under extreme pressure once article 50 has been triggered, “time is tight”.
Mr Dalton concluded: “For millions of insurance customers and thousands of claimants this is too big an issue to be left unresolved. The insurance industry must keep up the pressure for change.”