A Fair Deal for Claimants, Customers and Taxpayers – ABI Sets Out Alternative Framework for the Discount Rate

LONDON, May 12 -- The Association of British Insurers issued the following news release:

The Association of British Insurers has set out its plan for a fairer framework for setting the Discount Rate used to assess compensation for serious personal injuries. Changes proposed include 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 Discount Rate takes into account the return that claimants can typically expect to receive when they invest their compensation. 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 ABI 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.

In its response to the Ministry of Justice consultation, ABI sets out the principles for delivering a fairer system based on:

* Providing 100 percent compensation to claimants.

* No link to one particular investment asset. The current link to Index Linked Government Securities (ILGS) is flawed as it fails to recognise the investment options open to claimants, and how they invest their compensation.

* An allowance for the reality that claimants invest in a low-risk, mixed portfolio of assets which yield higher average returns than investing all a claimant's compensation in ILGS. Where claimants want to minimise investment risk, they can choose a Periodical Payment Order where the investment risk is borne by the compensator.

* A preference for replacing the current single rate with a 'stepped' dual rate - two rates for a single case to reflect different investment periods. This would take into account lower returns likely for claimants with short-term needs, while reflecting the higher returns that can be expected for claimants investing over a longer time horizon. A similar system is in place in Ontario, Canada, where for the first 15 years a short-term variable rate applies, updated annually to reflect returns on yields, with a fixed rate of 2.5 percent applying for any period over 15 years.

* A panel of experts including insurers, claimant lawyer representatives, independent financial advisers and actuarial firms, set up to assist the relevant Secretary of State in setting the rate. This panel would need to be consulted before any new rate was set.

James Dalton, Director of General Insurance Policy at the ABI, said:

"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."