IUA calls for dual personal injury discount rate
A dual rate system would allow different rates to be applied depending on whether an award is for a relatively short or long period
A dual rate model, featuring both short and long-term rates, would provide 'fairer and more accurate' compensation payments, association argues in response to Ministry of Justice consultation
The International Underwriting Association (IUA) has called for the introduction of a dual discount rate for calculating lump sum compensation awards in UK personal injury cases.
Responding to a government consultation, the IUA said a dual rate model, featuring both short and long-term rates, would provide “fairer and more accurate” compensation payments.
A dual rate system would allow different rates to be applied depending on whether an award is for a relatively short or long period and thus exposed to different levels of investment risk. This would provide claimants and re/insurers with greater certainty over agreed settlements, the association argued.
The current discount rate of -0.25% was set in July 2019, following the introduction of new methodology in the Civil Liability Act 2018.
The reforms were designed to create a fairer way to set the discount rate, taking account of a range of factors, including the investments claimants actually make and the investment returns they could expect to receive.
At the time of the 2019 review, the government actuary looked at the effects of applying a dual rate to claimant outcomes.
And while the evidence was “insufficient” to justify such a change in 2019, the then Lord Chancellor committed to seeking additional views and evidence ahead of the next review of the rate in 2024.
In its response to the Ministry of Justice consultation exercise, the IUA argued a more flexible dual rate system would lead to greater long-term stability in the size of awards.
This would allow insurers to operate with greater confidence in a complex marketplace that involves the settlement of individual personal injury losses worth tens of millions of pounds.
Dave Matcham, chief executive of the IUA, said: “The wellbeing of claimants is vital and we need a system that provides compensation in a correct and just manner. Most who receive a lump sum award invest, but rates of return can be quite different depending on the length of an investment.
“We believe, therefore, that an opportunity to apply a different rate for the part of a claimants award beyond 10 or 15 years would be much better. This would allow for short-term investment risks and financial market volatility to be more easily considered.”
The IUA noted that any change in the discount rate can have a major impact on the operation of the insurance market. A single rate model is less able to cope with changes in circumstances. Introducing a dual rate system, with a stable long-term rate, would limit the need for more frequent and dramatic rate adjustments.
“The approach we are advocating will bring forward a more equitable structure. It would result in a more balanced environment in which insurance and reinsurance firms can operate and the needs of claimants are met more accurately," Matcham added.
“By lessening the impact of large swings in reserves that can be caused by changes to the discount rate we will see a more stable, understandable and predictable environment for claims settlement.”