New Ogden rate proposals have finally been published. We explore whether insurers are likely to get a discount rate on the Civil Liability Bill?
As the dust settles on the introduction of the Civil Liability Bill and the changes to calculations for the discount rate, we consider some of the more interesting proposals and their implications for insurers.
The Bill follows publication of draft legislation and subsequent pre-legislative scrutiny by the Justice Committee and sets out the Government's proposal for how, when and by whom the rate will be calculated. The changes improve transparency and accountability for the process of setting the rate.
How should the rate be set?
The Government response to the Justice Committee recognises the discount rate is a relatively blunt instrument for ensuring that the 100% compensation principle is achieved.
The provisions seek to provide a fair and reasonable estimate of the return that should be expected to be earned on a lump sum award of damages for future losses. To achieve this, the Bill confirms that claimants are seen to be ‘low risk, not ‘no risk’ investors, judged by reference to their actual investment practices. This is a helpful change, as it will now reflect real world investment behaviours, and should prevent the overcompensation of claimants as seen with the previous regime.
Interestingly there was a clarification of the previous 0-1% estimate for the likely new rate under the new system. The Government advised this was intended to be a helpful indication of the potential scale of the change, but was not intended to represent the actual outcome. The Government now claims it would be inappropriate to speculate on the outcome of the first review. It is unlikely this clarification will dampen speculation that any further rate change will fall within the 0-1% estimate.
In respect to criticism about the evidence available when considering setting the rate, the Government also confirmed it intends to develop the existing evidence base ahead of setting the rate in the first review by:
a. Issuing a further call for evidence on the details of claimant investment behaviour. It is expected that this evidence gathering will run concurrently with the progression of the legislation to prevent a further delay. It is our view that the Government has useful evidence of claimant investment behaviour already, but in any event the first review will be carried out with the benefit of up to date evidence and analysis.
b. Commissioning the Government Actuary’s Department to carry out further research and analysis of the assumptions to be made about inflation, tax and management costs; and the effect of a range of rates under a wider range of assumptions – for example, as to the length of awards.
The Lord Chancellor and the appointed expert panel will consider the possibility of different rates for different cases, although it remains to be seen whether this option will be taken.
Both Ontario and Hong Kong adopt dual rates, resulting in two or three rates respectively for a single case. The ABI have stated that the Ontario model would be their preference, or it may be that the expert panel comes up with something entirely new. A multiple rate setup will pose new challenges for practitioners and may prompt satellite litigation concerning which discount rate should be applied, as the provisions bed in.
The Bill requires that in any review the Lord Chancellor and the expert panel will also:
- Publish an impact assessment of the effect of the change in rate every time the Lord Chancellor changes it;
- Investigate whether there are ways in which the use of PPOs could be increased. PPOs are not usually favoured by claimants and therefore we may see limited increases;
- Investigate whether a mechanism could be created to keep those responsible for setting the rate informed about investment behaviour. This would be a helpful way of demonstrating that the body of evidence is refreshed and presented to the expert panel in an independent manner;
- Consider whether the Government or a third party should review whether investment management costs should be recoverable as a head of damages. The Bill includes provision for fees to be included as a consideration when setting the discount rate. The rate would be calculated by reference to returns that are net of charges both for management and fees for advice, negating the need for such costs to be recoverable as a head of damage. This should ensure an outcome that is both fair to claimants and to compensators. Claimants will have access to and be able to afford the advice, but only when necessary and in a competitive market. Compensators will not be faced with meeting that future cost as a theoretical construct, avoiding difficulties where the cost and control of purchasing a service is separated.
Who should set the rate?
The Lord Chancellor will set the rate in consultation with an expert panel consisting of the Government Actuary and 4 other individuals with experience in actuarial work, managing investments, economics, and consumer matters as relating to investments. This is a useful composition of a mix of experts, providing non-partisan experts are utilised.
The quorum for the expert panel is to be increased to four, one of whom must be the Government Actuary. The decision to set the discount rate will continue to rest with the Lord Chancellor, who must provide reasons for the chosen rate and publish a report of advice from the expert panel. This provides the appropriate level of transparency and accountability previously lacking from the process.
When will the rate be set?
The initial review of the rate must be started within the 90 day period following the commencement of the Bill. Thereafter, each subsequent review must be commenced within 3 years of the last review, which is in line with the proposals set out in the draft legislation and is a good compromise between flexibility and certainty.
The Bill is due for its second reading within the House of Lords on 24 April 2018, then proceeding to the Committee and Report stages. There is impetus to get the Bill through the legislative programme as quickly as possible, hopefully before the end of the year.
The Government have taken on board the comments of the Justice Committee regarding the evidence base for claimant investment behaviours and has confirmed steps will be undertaken to broaden the evidence available ahead of the first review.
As with the whiplash reforms, much of the heavy lifting will be placed on the Lord Chancellor. Whilst the Bill does make great strides in setting out a workable basis on which the new discount rates will be established, the minutiae, including what the new rate will be, will remain up in the air until the Bill becomes law.