Yesterday the Government issued its latest consultation paper about the discount rate to be used for calculating future loss payments in personal injury cases. It has requested views by 11 May which can be fed in via the consultation home page.

The current law on the rate is that the Lord Chancellor sets it and has to follow the return on Index-linked Gilts (ILGS), which is presumed to indicate a risk-free approach to the investment of compensation. If this is going to change it will need legislation to change or repeal the Damages Act 1996 – a point which is confirmed in the Lord Chancellor’s written statement which accompanied the consultation.

The previous 2.5% rate lasted for 16 years from 2001 and was replaced earlier this month by a rate of -0.75% which was arrived at using the approach mentioned above.

Debate about the correctness or otherwise of the 2.5% rate may have been running for at least 6 years but the new consultation period lasts for only 6 weeks, to 11 May, after which the Government has committed to announcing its preferred options by 3 August. As that is not a sitting date, it could be that an early announcement might be made towards the end of the Parliamentary term on 20 July.

This is an absolutely critical issue for general insurers, reinsurers and other compensators. It is difficult to over-emphasise the need for a consistent and properly-supported response to the Government from this sector.

Our view is that the core issue here is the linking of the rate to ILGS yields. If that is to change, then convincing arguments will need to be made, supported by compelling evidence, about why it is now a flawed connection and about what should replace it as a benchmark.

Important secondary issues about who should set the rate (or rates), how frequently it should be reviewed, and about the use of periodical payments are also raised in the new consultation. Some thought needs to be given as to what extent these ‘process’ issues should either be directly addressed in new legislation or finessed in accompanying regulations. It would also be sensible for those responding to address awards for accommodation costs, because the current basis (set out in Roberts v Johnstone) could cause some quirks when used with the new negative rate.

Our take on this is simple. Setting the rate is politically charged and the Lord Chancellor no longer wants to do it and wants to pass the job on as quickly as possible, via new legislation, to another person or body. The Government also wants to revisit the use of the ILGS formula and, it seems, find a different proxy for low-risk investment behaviour shown by those receiving large awards for personal injury claims.

The consultation is both a call for views in support of this approach and for extensive evidence to inform the setting of a different benchmark rate (or rates). We held an early briefing on the consultation on the day of its release and we plan to hold further events during the very short consultation period to help customers share ideas about responses to what is probably the most important claims-related consultation of the last decade. Please feel free to contact us for more information on those or on any of the issues raised in the new consultation.