The government has rejected the view of MPs that there is insufficient evidence to change the way the personal injury discount rate is calculated.
But it agreed to “develop further” the existing evidence base ahead of setting the rate in the first review.
Ministers want to assume damages will be invested in a spread of ‘low risk’ investments rather than ‘very low risk’ as at present.
Asked to review draft legislation, the justice select committee last year issued a cautious response, saying the government needed more evidence on how claimants invest their damages before changing the discount rate.
The government published its response to the report yesterday alongside the Civil Liability Bill, which contained changes to the way the rate will be calculated in future.
The Ministry of Justice (MoJ) made clear that it believed it had evidence that the average real-world returns from investment decisions now “is very likely to be producing significant levels of over-compensation relative to the amount of compensation that would… be expected to be produced under the 100% compensation principle”.
It said: “The government does not… accept the committee’s view that the government’s evidence is insufficient to justify proceeding with the proposed reforms.”
The MoJ said it had proof that “the present system for setting the rate, which is based on a ‘risk free’ approach, tends to create excessively large awards of damages”.
Figures produced by the Government Actuary’s Department indicated that “average awards may exceed the expected return by about 35%, although after an allowance is made for necessary expenses on tax and investment management, this figure may fall to between 20-25%”, the response said.
However, in recognition of MPs’ concerns, the government would seek further evidence to inform the first review of the discount rate, including a call for evidence and analysis of figures obtained by government statisticians.
Asked whether it was targeting a median level of 100% compensation – given that the nature of the process meant some claimants would be over-compensated and others under – the government said it was not, adding that “the new approach to the setting of the rate will, relative to the approach of the present law, produce a higher discount rate and lower lump sum awards for future loss”.
The Lord Chancellor should be free to choose the discount rate “in the light of the circumstances prevailing at the time of the review”.
He or she would do so with the advice of the expert panel not more than every three years, and publish both their decision and the views of the expert panel in order to show “whether (if at all) the Lord Chancellor has departed from the advice of the… panel”.
The government accepted that the setting of the discount rate was “not a precise science”, but asserted that “the introduction of regular periodic reviews based upon evidence of investment practice will provide a mechanism by which the operation of the discount rate can be reviewed and its level adjusted regularly to ensure it remains as accurate as possible”.
It rejected the MPs’ suggestion that the government should take into account when setting the rate whether expected savings had been made on clinical negligence payments, or whether motor insurance premiums had gone down.
Claimant representatives were sceptical about the decision to go ahead with the reforms.
Brett Dixon, president of the Association of Personal Injury Lawyers, said: “People with catastrophic injury claims will almost certainly return to a situation where their compensation will not meet their needs, under changes to the way their claims are to be calculated.”
James Bell, partner in the clinical negligence department of London firm Hodge Jones & Allen, said: “We need to remember that seriously injured people, many with long term care needs, were under-compensated between 2001 and 2017 when the discount rate was set at the insurer friendly figure of 2.5%.
“The insurers made hay while the sun shone for 16 years. So, it is very disappointing to see the government rush through this legislation after only one year of the rate being set at -0.75%…
“The discount rate must be set to meet the needs of seriously injured people, not to boost insurers’ profits.”
Andrew Twambley, spokesman for the campaign group Access to Justice, said: “Since 2001, insurers benefited from a very high discount rate at the expense of very seriously injured people.
“The government re-balanced the rate in early 2017 to make compensation fairer, but fairness is evidently not something insurers subscribe to, especially if their record-breaking profits and dividends are threatened…
“It is essential that the rights of critically injured people are upheld, and that the government acknowledges that protection against serious injury is why we all pay our insurance premiums.”
However, in a letter to Lord Chancellor David Gauke that committed them to passing on the savings of the bill’s reforms, the bosses of 26 leading insurance companies said: “We remain committed to the principle of 100% compensation for victims of catastrophic injury but we also want to see a modernised framework that is fair for everyone who buys insurance.
“If the government’s proposed changes are implemented, we believe this will deliver on this principle. Serious injury claimants will still benefit from one of the most generous compensation systems in the world and one which would be roughly 50% more generous than it was just over a year ago.”