Gauke sets new discount rate at -0.25%

Gauke: Dual rate a possibility for the future

Lord Chancellor David Gauke announced this morning that he is to change the personal injury discount rate from -0.75% to -0.25%, a lower figure than was widely anticipated.

Insurers have been releasing reserves in recent months on the assumption that it would rise to 0% at the very least.

The change will take effect from 5 August. Mr Gauke said: “It is vital victims of life-changing injuries receive the correct compensation. I am certain this is the most balanced and fair approach following an extensive consultation.”

By way of example, the Ministry of Justice said a 30-year-old man with annual financial costs of £50,000 would be awarded £2,935,500 under the current rate. This would be £2,565,250 with the new rate.

The framework for setting the rate set out by the Civil Liability Act 2018 changed the basis of calculation from treating claimants as ‘very low risk’ investors to ‘low risk’.

The methodology required the Lord Chancellor to consider the actual returns available to investors, actual investments made by investors of relevant damages, allowances for tax, inflation and investment management costs and wider economic factors.

In a statement this morning, Mr Gauke said: “Having completed the process of a call for evidence and statutory consultation with the Government Actuary and HM Treasury, I am satisfied that the rate should be minus 0.25%…

“The Government Actuary also provided an analysis of dual rates. This would involve a lower short-term rate, followed by a higher long-term rate after a ‘switchover’ period.

“Although I consider their analysis interesting with some promising indications, I do not consider it appropriate for this review, noting the lack of quantity and depth of evidence required to adopt a dual rate.

“The potential of the dual rate to be appropriate for future reviews is one that I will consider in more detail through a consultation, which the Ministry will launch in due course.”

The Act requires the next review to occur within five years, conducted using an expert panel specifically established for the review.

Gordon Dalyell, president of the Association of Personal Injury Lawyers, welcomed the decision, adding: “The government has faced sustained pressure from the insurance industry to set a rate which would not be appropriate for injured people, who should not be forced to take any risk with their investments.

“We must remain vigilant that this new rate does provide them with the fair compensation they need and deserve.”

Ben Posford, head of the catastrophic injury department at London law firm Osbornes Law, said: “David Gauke is to be congratulated for resisting pressure from the insurance lobby to set a higher rate than this, which would simply have increased insurers’ profits at the expense of badly injured people.

“Investing damages that are needed to provide for an injured person is difficult at the best of times, and given the state of interest rates – which are likely to fall further in the event of a no-deal Brexit in particular – there was no justification for raising the discount rate any higher.”

Jonathan Wheeler, managing partner at London firm Bolt Burdon Kemp and a former president of APIL, similarly backed the decision, saying: “I am hopeful that the certainty now obtained from this early announcement will focus parties’ minds on settling outstanding claims which had been in a log jam waiting for this news.”

Huw Evans, director-general of the Association of British Insurers, said: “This is a bad outcome for insurance customers and taxpayers that will add costs rather than save customers money.

“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 the UK an international outlier at a time when we need to boost our attraction to international capital.”

Mark Burton, a partner at defendant firm Kennedys, said: “Today’s announcement confounds market predictions of a positive rate and risks continuing overcompensation.

“It is to be hoped that the Lord Chancellor’s statement of reasons offers meaningful transparency to compensators about the real-world net returns achieved by properly advised claimants from investing in a low-risk mixed portfolio, considering the significance of that data to the review outcome.

“From a claims-handling perspective, parties can at least now engage with more certainty during the next five-year review cycle.

“Practitioners deserve a lot of praise for the creative ways in which they have continued to settle cases whilst awaiting a resolution. The new statutory process of regular reviews should ensure that the market does not experience similar disruption again.”

Martin Milliner, claims director of LV= General Insurance, said the increase did not go far enough: “At this level we believe that claimants will remain over-compensated, thus undermining the common law principle of 100% compensation.

“This means that uncertainty will remain for claimants, lawyers and compensators alike as this rate will be surely challenged once again at the next review in five years’ time.”

On Twitter, David Williams, managing director of underwriting and technical services at AXA Insurance, said: “A real missed opportunity, this is below what people are actually obtaining in terms of investment on lump sums, and is below where insurers have been reserving & pricing on the assumption of a higher rate. Bad news for the NHS as well as motor insurance premiums.”

Speaking for the Forum of Insurance Lawyers, Tony Cawley, a partner at Clyde & Co, said: “It is very disappointing that the numerous representations made by FOIL and the insurance industry have failed to be taken into consideration.

“Although the Lord Chancellor refers to the new statutory test in the announcement, FOIL does not believe that the new rate reflects how claimants actually invest their damages. Today’s new confirmed rate will be particularly concerning to the insurance market generally but also to many public bodies.”

Also on Twitter, Charles Bagot QC of Hardwicke wrote: “Is that the final death throes of Roberts v Johnstone we can hear? With another discount rate in negative territory, a new approach to accommodation claims via the upcoming appeal in Swift v Carpenter later this month, is overdue.”

Simon Kayll, chief executive of the Medical Protection Society, said it was disappointed by the size of the increase.

“The new rate announced today does not come close to the rate of 2.5% that was in place between 2001 and early 2017. We therefore expect that the cost of clinical negligence will remain very challenging for the public purse, the NHS, doctors and the wider economy.”

He noted that figures released last week by NHS Resolution showed that of the £2.4bn spent by the NHS in 2018/19 on clinical negligence claims, £400m related to the impact of the change to the discount rate made in March 2017.

Mr Kayll added: “We welcome the speed at which the government has moved to reform the law on how the discount rate is set. The government has however been much slower in introducing a long-awaited and much-needed strategy to address the rising cost of clinical negligence. Urgent and bold legal reforms are now desperately needed.”

Stuart Hanley, deputy head of Minister Law, described it as a “humane decision” that reflected how it was “a risky and costly business for claimants to invest their compensation successfully in order to fully fund the enormous changes in their lives following serious injury”.

He said the revised rate also mirrored the likely outcome of a similar exercise in Scotland, “ensuring there is a level playing field across the UK”.

Mr Posford also pointed out that enthusiasm for more use of periodical payment orders (PPOs) by insurers needs to be tempered by the risk presented by a no-deal Brexit: “If an insurer based outside of the UK – as several leading names are – fails, then there is a question mark over whether the Financial Services Compensation Scheme will cover the PPO payments the insurer has committed to, leaving severely injured people penniless.”

More detail and reaction to follow during the day

Leave a Comment

By clicking Submit you consent to Legal Futures storing your personal data and confirm you have read our Privacy Policy and section 5 of our Terms & Conditions which deals with user-generated content. All comments will be moderated before posting.

Required fields are marked *
Email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.