The justice select committee has accepted an invitation by the Ministry of Justice (MoJ) to undertake pre-legislative scrutiny of the draft legislation to reform the discount rate.
Earlier this month, the MoJ announced that it wanted to change the basis on which the rate was calculated, setting it by reference to ‘low risk’ rather than ‘very low risk’ investments as now.
David Lidington, the Lord Chancellor, has asked that it complete the work by the end of November.
“I am keen to make progress with the proposals because of the significant financial impact of unreasonable assumptions reflected in the current rate and to minimise the length of the period of uncertainty as to what the law will be,” he wrote in a letter to Bob Neill MP, who chairs the committee.
Mr Lidington said the MoJ would be engaging with stakeholders “pro-actively with a view to collecting their opinions by the end of the conference recess”. Parliament returns on 9 October after the party conferences.
He added: “I hope this scrutiny will help ensure that the provisions are technically effective and provide assurance to interested parties that the government is committed to ensuring that compensation remains full, fair and reasonable in the light of changing investment conditions.”
The select committee has issued a call for evidence – by 13 October – asking for views on whether the draft legislation reflected “actual claimant investment behaviour” and ensured claimants were compensated in full, “neither more or less”.
It also wants views on the fairness and impact of the legislation, and the process its sets out, such as appointing an expert panel to advise the Lord Chancellor and reviewing the rate every three years.
Click here for the details on submitting evidence.
Meanwhile, of those insurers that put out statements following the MoJ’s announcement, it appears that only LV= committed to passing on all of the savings to its customers.
Steve Treloar, managing director of general insurance, said: “The new system will not only ensure fair payments for those making claims but it will also help reduce the cost of car insurance for drivers at a time when premiums are at record highs for hard pressed motorists, and LV= commits to passing on 100% of the savings produced by this legislation.”
Colm Holmes, chief executive of Aviva’s UK general insurance business, said the decision was “good news for our customers, as any measures which reduce the rising costs of insurance will directly feed through to premiums”.
It was similar from Stephen Hester, RSA Group chief executive, who said: “If passed, the benefits will be felt by all our customers, helping to stop the rot of steep rises in premiums, which are having a disproportionate impact on costs for motorists, businesses and the NHS.”
Analysts predicted big savings from insurers if the rate was changed to between 0% and 1%, as the MoJ indicated may happen under the new formula.
Tony Sault, UK general insurance leader for EY, said: “Earlier this year, EY estimated that the changes to the discount rate would cost the insurance industry an additional £3.5bn and add 6.5% to customer premiums and we found these numbers were closely borne out in practice…
“A revision to 0% could reduce these costs by one-third, meaning reserve releases of £1.2bn, while a change to 1% could reduce this by two-thirds, meaning up to £2.5bn could be saved by insurers and reinsurers compared to their current booked position.
“We would also expect the recent rise in premiums to level off in anticipation of the new legislation, and ultimately premiums could fall between 2% and 4%, saving up to £21 on the average premium to the consumer.”
Mohammad Khan, UK general insurance leader at PwC, said: “Premiums had already risen by about £75 on average and about £250 for young drivers following the original discount rate announcement earlier in the year as insurers passed on roughly half of the expected costs caused by the original rate move.
“If this… announcement had not been made, insurers would have been forced to pass on the remaining costs and annual motor insurance premiums would have risen again in November and December by an average of £100 for UK motorists and by between £300 and £500 for young drivers.”
If the legislation passed, he said, premiums should “remain stable for the next six months”.