UK City Minister Stephen Barclay has hinted that a significant change to the discount rate and the methodology used for calculating the rate is to be expected.
Speaking at the Association of British Insurers "Brexit – the road ahead" event, he said the current mechanism (utilising the rate of return of index-linked gilts) is outdated and does not reflect the way people invest in the real world.
This is the first indication following the Government's consultation in May 2017 that the discount rate may be amended in a favourable way for insurers. Indeed, the Queen's Speech on 21 June 2017 failed to mention any legislation in relation to the revision of the discount rate. However, as the briefing note to the Queen's Speech noted there would be room in the Civil Liabilities Bill for wider personal injury reform, it is hoped this much needed reform will be addressed in this legislation.
The news will be welcomed by insurers as the drastic cut from 2.5% to minus 0.75% early this year resulted in insurers having to pay injured claimants significant additional damages for future losses, leading to overcompensation.
As we set out in our response to the Government's consultation, it is important to note that there is no mandatory requirement for an injured party to behave in a 'risk averse' manner and therefore the current legal framework is both unrealistic and outdated. Under the existing rate, claimants will be compensated on that basis, but could make their investment decisions on an entirely different basis, leading to overcompensation.
Any new framework must ensure it remains fair to victims, whilst accurately reflecting claimants' investment behaviour, so the system is both viable in the long term and not unreasonably onerous to either party.