Scotland to keep discount rate at -0.75%

Clarke: No consultation this time

The discount rate in Scotland is to stay at -0.75%, the Government Actuary has decreed in another decision that has angered insurers.

But the Association of Personal Injury Lawyers (APIL) has praised the Scottish government for following the lead of Westminster in resisting “the shameless and sustained pressure from insurers” to raise it.

In July, the then Lord Chancellor David Gauke increased the discount rate in England and Wales from -0.75% to -025%, but still significantly lower than many – particularly insurers – had been expecting.

The Damages (Investment Returns and Periodical Payments) (Scotland) Act 2019 became law in April and changed the way the discount rate was to be calculated.

It approaches this in a different way to the Civil Liability Act 2018 by putting the decision in the hands of the Government Actuary and being far more prescriptive about what should be in the notional investment portfolio used to calculate the rate, along with a hypothetical investment period of 30 years.

Martin Clarke, the Government Actuary, said he had reached a figure of 0.5%, which was then subject to two prescribed adjustments: -0.75% for tax and costs of investment advice and management, and -0.5% for further margin on the rate of return.

He added that, under the previous Wells v Wells approach, the rate would have been between -1.5% and -2%.

Mr Clarke said that, although the Act allowed him to consult in making his recommendation, he chose not do so because there was a relatively short period between the new legislation coming into force and the timing of the first review, “which means that there is limited scope for new evidence or views to emerge”.

Further, he said, he was able to test the suitability of the economic assumptions made against his department’s “house views and other publicly available sources”, and also considered the evidence collected for Mr Gauke’s decision.

As in England and Wales, the rate will now be reviewed every five years.

Alastair Ross, assistant director, head of public policy (Scotland, Wales and NI), at the Association of British Insurers, said: “This is a bad outcome for Scottish insurance customers and taxpayers that does not reflect the real world environment of how investment decisions are made.

“It means that compensators, including the NHS, public bodies and insurers, will face higher payouts in Scotland.

“A discount rate that’s lower for Scotland than England and Wales will mean higher insurance costs north of the border, which could push up premiums for Scottish motorists as a result.”

However, APIL president Gordon Dalyell welcomed “the certainty which this announcement will bring to injured people in Scotland and the transparency in the way the discount rate is calculated”.

He said the fact the calculation was set out clearly in legislation, minimising political influence on the process, “is very welcome in these times of economic and political uncertainty”.

Mr Dalyell added: “Governments in both Westminster and Holyrood have faced shameless and sustained pressure from insurers to set the discount rate at a level which suits their profit margins rather than injured people, and the transparency of the Scottish legislation, in particular, is a protection against that.”

Data analytics company Consumer Intelligence said yesterday that the change in England and Wales has pushed up motor premiums by an average of 0.7% in the past three months.

The recent interim results from Admiral Insurance, meanwhile, said the rate had reduced its UK motor profit in the period by £33m because of “higher claims incurred and lower profit commission”, and increased its combined ratio by almost 7% points to 86.5%. It had been reserving on the basis of a 0% rate.

The total impact of the new rate on Admiral’s profit is expected to be £50-60m.

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