Industry Comment on Commons Select Committee Discount Rate Hearing

Here is some feedback from BIBA on the Justice Select Committee hearing earlier today, firstly from BIBA;

Graeme Trudgill, Executive Director of the British insurance Brokers’ Association (BIBA) said:

 “We welcome the Committee’s scrutiny of this vital piece of draft legislation.”

 “Currently, a Discount Rate -0.75% suggests  that claimants lose money from investments, rather than them attracting an investment income. This is clearly not the case and underlines why this legislation is urgently needed.

 “The Committee has indicated it would like to see more evidence of how claimants invest their damage awards if the Government wants to maintain the objective of 100% compensation – something which is fundamental to the principle of indemnity in insurance.

 “While more evidence may be useful to provide confidence that claimants will not be under-compensated, we feel that the Government already has much evidence to demonstrate that in the real-world, claimants do not lose money from their investments. Any further delay would exacerbate the wider social impacts that a change to a negative rate value has already had.

 “The Government Actuary Department (GAD) has provided analysis from 1,000 investment scenarios and found the claimant was over-compensated in 95% of the cases.

 “In our evidence to the Committee, we emphasised the impact that a minus discount rate has upon our members’ customers namely significantly increasing premiums, particularly for young drivers. Following the rate change, there has been a 10% increase in the rate of uninsured driving claims.

 “Furthermore, standard liability limits of cover  which were arranged when the discount rate was 2.5%, may now be insufficient – putting firms, specifically small businesses, at risk of under-insurance and bankruptcy should a significant liability claim arise. We suggest customers who are concerned should speak to their insurance broker to review their limits.

“We look forward to Government identifying a suitable Bill to take these clauses forward at the soonest opportunity.”

david-johnson weightmans law

David Johnson from Weightmans

Here’s another view from David Johnson, member of the Forum of Insurance Lawyers and Partner at Weightmans: 

Today the Justice Committee’s recognition of the impact of the discount rate on wider society, and the suggestion that that might legitimately be taken account of when future reviews are carried out, will be welcomed by compensators. 

The Committee have urged the Government to obtain clear and unambiguous evidence about the way in which claimant’s invest their lump sum damages, the reasons for their choices and the extent to which they obtain fair compensation, before the legislative basis for the calculation of the discount rate is changed.  That will inevitably delay a further review of the discount rate, which will not be good news for insurers. 

There is some good news for insurers in that the Lord Chancellor is encouraged to make a provision for him and his predecessors to publicise their reasons for arriving at a particular rate when reviewing the discount rate in the future, in particular where he/she deviates from the advice of the expert panel advising him – this will bring the transparency wanted within the industry. 

Overall the report does not prevent Government from moving forward with the legislation. Some notes of caution are set out within the report and will need to be addressed before the industry can move away from the current -0.75% discount rate towards a higher rate.  If the Government acts on the recommendations within the report, there will be further delays, which in turn, is not good news for insurers.

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