The Civil Liability Bill ("the Bill") had its first reading on 20 March 2018. Considerable relief was felt across the personal injury insurance industry as the Bill paves the way to a rise in the discount rate for personal injury claims.
Before March 2017 the discount rate, which is the rate applied to personal injury damages to account for the investment of a lump sum payment, was set at 2.5 per cent. This rate, set on 25 June 2001, began to draw criticism in 2010 because whilst the discount rate remained at 2.5 per cent, the average yield on Index-Linked Government Stock had dropped significantly. The effect was that most claimants were being under compensated because the sums they were investing did not adequately meet their long term needs.
From 20 March 2017 the discount rate swung the other way to minus 0.75 per cent. This was met with wide criticism from the insurance industry who immediately had to start paying more money to claimants to compensate them for their loss.
The Government is now, through the Bill, trying to appease both claimants and defendants and their insurers by finding a middle rate. In the consultation process the Government said it expected that a new rate would be between 0 – 1 per cent. The mechanism for arriving at an actual rate is set out in the Bill.
The key features of the personal injury discount rate part of the Bill are as follows:
- The assumption of how claimants will invest their lump sum money has changed. Whereas previously the assumption was that the claimant would only invest in a "very low" risk investment, the assumption is now that the claimant will make investments involving "more risk than a very low level of risk" but "less risk than . . . a prudent and properly advised investor".
- The first review of the rate must take place within 90 days of the Bill coming into force. Once the review has begun a determination of either a new rate or the same rate must be announced within 180 days of the review starting.
- A review of the rate will take place every three years.
- Every review process, including the initial review, must consult an expert panel. The expert panel will be made up of an actuary, an economist, an expert in consumer matters that relate to investments and an expert in managing investments.
Insurance companies and defendants should welcome this Bill because it is very likely that personal injury discount rates will rise and defendants will pay out less in damages for personal injury claims. The likelihood of a rates rise is based on two reasons, the simplest of which is that the Government has indicated in the consultation that rates will rise to between 0 – 1 per cent. The current feeling is that a discount rate of 1 per cent is a likely outcome.
The second reason, and the more promising in the long term, is that the assumption on how claimants will invest their money has changed. The Government and panel of experts will now be compelled to assume that claimants will invest their money at a slightly riskier level than previously. The logic goes that the riskier the investor, the higher the rate of return for the claimant and this results in the discount rate being higher to prevent over-compensation.
The Lord Chancellor still holds the final say on what rate to fix but is required to "consult" with the expert panel and the Treasury. It remains to be seen whether this will operate like the Bank of England Monetary Policy Committee in terms of authority and transparency, or whether it will be more of an advisory body subject to political pressure and the whim of the Lord Chancellor from time to time, and with a more restrictive approach to the publishing of "information about the response" of the panel.