Personal injury discount rate and whiplash claims reforms get Parliamentary approval
Posted on: 28 November 2018
On Tuesday 20 November, the eagerly anticipated Civil Liability Bill passed through the House of Lords, meaning we’re now waiting for a date to be set for Royal Assent, when it will become an Act of Parliament.
The Act will bring into law changes to the claims process for whiplash injuries and the way that the 'discount rate' for serious personal injuries (aka: the Ogden Rate) is determined.
The relevant Commons Library briefing paper, published in August, explained how the package of measures in the Bill would (in brief):
- set a tariff of compensation for whiplash injury claims within drafted regulations (with provisions for an uplift in exceptional circumstances);
- ban settlements for whiplash claims where there is no medical evidence; and
- replace the current discount rate, which is based on a "zero risk approach", with one "based upon a rate of return that, in the opinion of the Lord Chancellor, a recipient of relevant damages could reasonably be expected to achieve" through investments.
For the last part, concerning the discount rate, a "fine distinction is being enshrined in the law, between a risk averse recipient (but one who accepts some risk) and a normally risk averse investor. The Bill enshrines a procedure for regular reviews of the discount rate and that there will be an 'expert panel'to assist the Lord Chancellor in determining the rate."1
These changes should be met with relief by the insurance industry and the NHS, however it was noted in the research briefing that "those involved in supporting those making claims" (namely claims management companies and solicitors) were "against" them1.
On 27 February 2017, Liz Truss, then Lord Chancellor, announced that the Ogden discount rate would be reduced from 2.5% to -0.75% as of 20 March 20172, meaning that compensation payments for those suffering from serious bodily injuries would increase significantly.
The insurance industry immediately began campaigning for change, pointing out that it would cause reconsideration of pricing requirements; In other words, it would leave insurers with no choice but to increase premiums.
Reacting to the announcement, Allianz CEO, Jon Dye said:
The new rate announced by the Lord Chancellor is extremely disappointing. We believe that the system used to calculate the discount rate is flawed and does not take into account the current investment environment and the financial choices available for claimants."
Alongside Jon’s comments, we published an illustration that demonstrated the role the rate plays in calculating compensation payments, and therefore the impact the change would have:
The change also had a significant impact on the NHS as the discount rate is applied to clinical negligence claims; these amounted to £1.7bn in 20173.
A letter written by the Association of British Insurers (ABI) and signed by 26 UK insurance industry CEOs, including Allianz’s Jon Dye, was sent to the Lord Chancellor in March 2018, welcoming "the Government’s plans [in the form of the Bill] to address the persistent and significant cost of exaggerated low value personal injury claims":
We remain committed to the principle of 100% compensation for victims of catastrophic injury but we also want to see a modernised framework that is fair for everyone who buys insurance. If the Government’s proposed changes are implemented, we believe this will deliver on this principle."
The NHS Confederation had issued their own letter to the Lord Chancellor "calling for urgent action" a month earlier and on the heels of the ABI letter, as the Bill was being prepared for the House of Lords, we commissioned Rachel Gordon, ex-editor of Insurance Age, to interview three Allianz technical experts to get their views a year on from the reduction of the discount rate:
On hearing that the Bill is now ready for Royal Assent, Simon McGinn, General Manager, Commercial and Personal, Allianz, said:
We are hopeful the bill will receive Royal Assent relatively quickly which will trigger the process for setting the Discount Rate. We should keep in mind that the industry was taken by surprise before on this issue back in February 2017 when the rate was reduced to -0.75%. As a prudent insurer we will continue to proceed with caution until any new rate is finally confirmed."
Related articles on eBroker:
- Half year review 2018, by Neil Clutterbuck
- Insurance needs to be louder and prouder
- Jon Dye joins other insurance CEOs in encouraging action to tackle rising motor and liability claims costs
- The discount rate: One year on
- Average cost of motor premiums at record high