LMA and ABI call for 'fair' framework for discount rate

The Lloyd’s Market Association (LMA) and Association of British Insurers (ABI) have called for a major  overhaul to the way personal injury discount rate is set, citing the existing framework as "fundamentally flawed".

The organisations have set out their plans for a "fairer framework" for the discount rates.

Currently, the discount rate is set with reference to index linked gilts, rather than the balanced investment portfolios widely used by claimants. This discrepancy will inevitably lead to over-compensation of claimants, the LMA said in a statement.

In February the Lord Chancellor announced that the rate would reduce from 2.5 percent to minus 0.75 percent. At the same time the Government announced a review into how the rate should be set in the future.

The LMA outlined that the rate is set solely by the Lord Chancellor under powers granted by the Damages Act 1996; a process that it believes is "inadequate".

"The discount rate should be based on a realistic investment vehicle, to make it more accurate, reducing the risk of over-compensation," said David Powell, the LMA's non-marine manager. "We are suggesting using the average yield of a model low-risk portfolio, better reflecting what claimants actually do with their money."

"A new process would provide greater certainty and transparency, reducing the risk of unexpected and significant changes in the rate," Powell added.

In its response to the Ministry of Justice’s consultation, the LMA has suggested a model portfolio should be agreed by a suitable panel of experts and published for transparency. The discount rate should be reviewed periodically to reflect material changes in the yield of the underlying portfolio. The LMA also advocates measures to smooth the effect of short-term economic volatility, such as limiting rate changes to one per year, and a maximum shift of 100 basis points at a time.

ABI's director of general insurance policy James Dalton stated that changes to the broken system are "essential". In addition, the association has proposed certain changes including moving away from reliance on any one investment option, a preference for a dual rate framework, and setting up a panel of experts to provide advice on setting the rate.

The ABI said that it has repeatedly warned that the current discount rate would mean significant extra costs for insurers and other compensators, and inevitably lead to higher insurance premiums for millions of motorists and businesses. This is because the way the rate has been set does not reflect the investment advice typically given to claimants and how they typically invest their compensation.

Dalton commented: "Ensuring that claimants receive full compensation must be at the heart of how personal injury compensation is calculated. But it is now widely acknowledged that the current methodology used to calculate the discount rate is fundamentally flawed as it does not reflect the reality of how claimants invest their damages in practice. This broken methodology means significantly higher costs for all compensators, including the NHS, and inevitably higher insurance costs for millions of consumers and businesses.

"Retaining the status quo is not an option - it is essential that the new Government changes the framework to ensure we have a system that is fit for purpose for claimants, insurance paying customers and compensators. If delivered our proposals will help keep down costs for motorists, businesses and taxpayers, while still delivering fair compensation to those who need it most."

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