New discount rate - what next for Scottish claims?

On Monday 27 February the Lord Chancellor, Liz Truss, announced that the discount rate for lump sum future loss calculations in personal injury claims will move from 2.5% to -0.75% from 20 March 2017. It will apply to England and Wales only, and this article will briefly examine the immediate impact of the announcement, but will also consider what impact this will have in Scotland.

The announcement came a little earlier than expected, although only by a matter of days.Although rumours had been circulating for some time, the extent of the cut really did catch insurers unaware.Many had prepared for a move to 1% or 1.5% but it seems fair to say that nobody expected the Lord Chancellor to go so low.

Why so low?

The rate is designed to ensure that lump sum compensation for future losses following an injury reflects the likely return on the investment of that compensation. The rate has traditionally been calculated on the assumption that investment will be made in index linked gilts.Investments and savings have gone through a well-publicised struggle to provide any meaningful return over the past few years, and none more so than index linked gilts.Whilst it is questionable whether that really is where claimants invest their compensation, it does explain why it is proposed that personal injury multipliers will now be adjusted by a figure that no longer represents a discount at all.

The immediate impact

The move has been described by the ABI as "reckless", the ABI has also accused the Lord Chancellor of having an "utter disregard for the impact... on consumers, businesses and the wider operation of the insurance market."

A number of insurers saw share prices fall immediately amid predictions of loss of profit into the many millions.It is easy to see why: the change in the Ogden multiplier will see many future loss claims more than double and, in some heads of claim, increase up to six-fold.In cases with significant future loss of earnings and care, the move can add millions of pounds and periodical payments suddenly become much more attractive to insurers.

Ultimately, this will hit consumers and businesses as insurers feel forced to increase an estimated 36 million premiums.According to estimates by PwC, average annual motor insurance premiums are likely to rise by £50-£75, £300 for older policyholders and £1,000 for younger drivers.That will hit hard, and is likely to lead to a rise in false disclosure at policy inception and renewal _ to include "fronting" for young drivers _ as consumers try to manipulate their premium to an affordable level.It will also more than cancel out the estimated £40-£50 reduction which has resulted from the new whiplash reforms, particularly when viewed alongside the impending rise in premium tax from 10% to 12%.

The likely impact on the National Health Service has not gone unnoticed, and the Lord Chancellor has promised that the NHS will be given a budget for compensation.Clinical negligence claims are however some of the most costly and the impact has been estimated at £1 billion.At a time when budgets are tight, this does give significant cause for concern.

What's next?

The announcement comes with a promise to review the framework, with a consultation before Easter focussing on the frequency of reviews, whether review should be by an independent body and importantly, whether the focus on index-linked gilts is correct.

Whether that changes the rate remains to be seen, but for now many insurers are not leaping to review reserves on significant claims.That cannot be put off for very long but, given the stance adopted by the ABI which is pushing hard for the review to take place long before Easter, they can be forgiven for not terrifying their reinsurers until the dust settles. Indeed, following a meeting with insurers the Government has committed to an "urgent" consultation so things are not quite as certain as they might have appeared on Monday 27^th February.

What do they change their reserve figures to? Unhelpfully, the Lord Chancellor has landed on a rate that is not contained within the current edition of the Ogden tables.Splitting the difference between the -1% and -0.5% allows a rough calculation, but the figures are not linear so that approach is not accurate.

That issue goes beyond the merely practical.Many figures simply do not make sense when the above formula is applied.Of particular note is the traditional Roberts v Johnstone analysis which under the "new" figures seems to suggest that the need for alternative accommodation leads to no cost.

This will all hopefully be addressed in advance of the 20 March implementation date. In the meantime, one important approach that all insurers should be adopting is to check their files for claimant Part 36 offers which may suddenly become more attractive.As claimants will undoubtedly move to withdraw the offers, speed is very much of the essence.

....and in Scotland?

As was the case in 2001 when the 2.5% rate was introduced, the change does not immediately take effect in Scotland and until it does, the 2.5% rate remains in force.Back then, it took almost eight months for Scotland to follow the rest of the UK and at the time of writing there has been no announcement north of the Border.

In recent years the Scottish Government has illustrated on a number of occasions just how quickly it is able to legislate when required so the wait may not be so long this time.On the other hand, the current Government has proven perfectly willing to take a different approach to Westminster _ legislation on pleural plaques and fatal damages are perfect examples.

It would be a brave person who bets against Scotland following suit, but the effect on the already stretched Scottish NHS will be a significant concern. It seems likely that the Scottish Government will watch the consultation and review with interest, gauge whether public opinion favours the consumer or the claimant, and act when there is a little more certainty.

In the meantime:

• The 2.5% rate applies and many insurers and other compensating parties will be bound by that, unable to offer more until the rules change.
• Claimant part 36 offers or tenders are not valid in Scotland, but it is worth revisiting proposals that have been made in correspondence.
• Claimants are likely to delay any settlement discussions, but court timetables are short and the Scottish courts are reluctant to move trials.Parties may find themselves having to make tough decisions on the risks before the ultimate discount rate position has settled.
• All cases should be reviewed as quickly as possible, and whilst reserving philosophy is a matter for each individual insurer, there will be cases that can be resolved swiftly against a significant risks that things are about to get much worse.

We will be monitoring the situation as it progresses, and will be making the appropriate representations at any consultations.In the meantime, please do not hesitate to contact us if we can be of any assistance with your approach to Scottish claims.