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Large-loss PI cases “already settling” at higher discount rate

Holt: Insurers expected a quick reversal of discount rate

Large-loss personal injury (PI) claims in recent months have settled on the basis of a discount rate of up to 0.5%, the boss of one of the leading investors of PI damages said this week.

Mark Holt, managing director of Frenkel Topping, said he has been seeing “all sorts of tactics” by defendants to otherwise delay settlements until after 5 August 2019, when the Lord Chancellor is likely to increase the present discount rate from its current -0.75%.

On Tuesday, Lord Chancellor David Gauke formally began his review of the rate, as required by the Civil Liability Act. The Act gives him 140 days to make a decision, meaning it must be concluded by 5 August.

As part of this, he is required to consult both the Government Actuary and the Treasury.

Speaking at the Legal Futures Civil Litigation Conference the same day, Mr Holt said the reduced rate should have been -1.93% on the basis of the return on index-linked government gilts at the time, but the then Lord Chancellor, Liz Truss, took account of insurer interests in not going that far.

“Over the last couple of months, on the large loss claims we’ve been settling, the assumption has been for a 0% to 0.5% discount rate,” he said.

We reported last week [1] that both Aviva and Admiral Insurance were working on the basis of a 0% rate. Mr Holt said several other insurers were doing the same.

He outlined the difficulties of investing – while 2017 was best year on record for asset-class performance, 2018 was the worst – and the variations in investment portfolios.

He said: “The Lord Chancellor has a real challenge on his hands to come up with method that’s going to come up with a discount rate based on variable different portfolios.”

Asked if defendants were going to start delaying cases until after the new rate is set, Mr Holt said that has been going on since rate since changed in February 2017, as the insurance industry thought there would be a “snap decision” to change it back after it protested.

Though it has taken longer than expected, the knowledge that the rate will change by 5 August at the very latest, “we’ve seen all sorts of tactics to delay beyond that date”.

Responding to Tuesday’s announcement, Brett Dixon, president of the Association of Personal Injury Lawyers, said: “I hope the Lord Chancellor will make his decision based on the very real needs of people who suffer catastrophic, life-changing injuries through no fault of their own.”

He also urged Mr Gauke to address barriers to using periodical payment orders (PPOs): “If the government is determined to make changes to the discount rate, it is important to make sure we have a new way of using PPOs at the same time.”

Alistair Kinley, director of policy and government affairs at insurance firm BLM, said the current basis for calculating the rate was an “obviously flawed assumption that people invest compensation in a way that loses money year-on-year”.

He continued: “The review that starts today will take a more realistic approach to investment and should deliver a more realistic discount rate. People dealing with claims between now and August need to bear this in mind.”

Anthony Baker, vice-president of the Forum of Insurance Lawyers, added: “FOIL considers that low-risk claimant investors will still achieve capital growth on their compensation sums by instructing wealth managers and IFAs to manage a wide spectrum of portfolio investments.

“These investment strategies need to be taken into account by the Lord Chancellor and the Government Actuary when setting the discount rate.”