Discount rate change expected within eight months

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Compensators should start preparing for a new personal injury discount rate as it will come into force in no more than eight months, according to law firm Kennedys.

The Civil Liability Act 2018 received royal assent yesterday. Under its provisions, the lord chancellor, David Gauke, must start a review of the discount rate within 90 days. He must then determine the rate within 140 days of the review commencing, meaning that the latest he can set the new rate is 7 August 2019.

The Ministry of Justice has already started preparing for the discount rate review by issuing a call for evidence on 6 December. It closes on 30 January 2019.

The discount rate is almost certain to change from the current -2.5% because the act alters the way in which it is calculated, according to Kennedys.

At present, the assumption is that claimants choose ‘very low’ risk investments for their damages. This will change to an assumption that they will select more risk than a very low level, but less risk than would ordinarily be accepted by a prudent and properly advised individual investor.

The lord chancellor must consult with both the government actuary and the Treasury as part of this process.

Deborah Newberry, head of corporate and public affairs at Kennedys, said of the discount rate changes: “Reform to the discount rate is to be welcomed and it will in future reflect a real-world approach to how claimants invest their damages. Compensators will in turn be able to plan their reserves in a more realistic manner.”

“We can expect a certain amount of tactical manoeuvring in the coming months ahead of a change in the rate, but at all times both claimant and defendant lawyers must bear in mind the importance of doing what is best for the client.”

“Given the call for evidence has already begun, we could see a new rate before August 2019.”

Dr Matthew Lee, director of professional services at the Medical Defence Union, welcomed passage of the legislation. He said: “The personal injury discount rate was drastically reduced by 3.25% in 2017, which has driven up the cost of clinical negligence claims dramatically. It has doubled and, in some cases, trebled high value claims making £37 million the NHS’s highest award to date. The act requires a change to the way the rate is set and should go some way to redressing the financial damage caused to the NHS and GP indemnity costs by the personal injury discount rate reduction.”

“The lord chancellor has 90 days to start the rate review and the determination must be made within 140 days after that. While this is welcome news, we don’t expect the rate to be restored from its current level of -0.75% to the previous rate of 2.5%. Awards will still be considerably higher than before.”

“The Civil Liability Act is a step in the right direction but we still need radical legal reform to restore balance and fairness to the way compensation is awarded.”

Royal assent is also another milestone on the road to whiplash reform, which the Ministry of Justice plans to bring into force in April 2020. Newberry added: “The fight to ensure a proper balance in low-value personal injury claims does not end today, as regulations to be made under the act will need to fill in crucial detail about how the new regime will work.”

“The government needs to make sure that it does not leave open avenues for behaviours that seek to exploit the system and will create satellite litigation.”

“There remains also the concern that claims management companies will look to take advantage of the new system. The Ministry of Justice and the Financial Conduct Authority (FCA)—which takes over the regulation of claims management companies in April 2019—will need to stay alive to how the market changes so as to prevent fraud and claims farming.”

Following the legislation receiving royal assent yesterday, Mark Hemsted, a partner at law firm Clyde & Co, said: “This is a very welcome Christmas present for both the public and insurers. The reforms, coupled with the anticipated raising of the small claims limit in 2020 to £5.000, are all about reducing the cost of motor insurance for the British public—and it will do that. The question is by how much.”

“The proposed raising of the small claims limit means that claimant solicitors will have a much bigger hurdle to leap before they can recover costs. That could either deter claims—or it could lead to a sudden increase in the number of higher value claims as it clearly creates an incentive to go large, so to speak.”

“The bill requires that regulations are made on various aspects, including the levels of tariff, uplift in exceptional circumstances, medical reporting procedure and FCA regulation and reporting. These statutory instruments will be debated in both houses pursuant to the affirmative resolution procedure. It appears there will still be lots at stake for which insurers will need to argue if the potential benefits for insurers and the public are to be fully realised.”

Qamar Anwar, managing director of First4lawyers, commented: “The battle over the bill may be over, but the war against a regime that will add insult to innocent claimants’ injuries is not. The act cannot be implemented without secondary legislation detailing crucial elements of the reforms—such as the level of compensation injured people will receive—so the government should be on notice that we and others will be focusing our campaigning efforts on that secondary legislation.”

“There’s also the added issue of the proposed online portal for personal injury litigants. There is very little confidence in the industry that this will be ready for use by thousands of consumers from the government’s planned implementation date of April 2020. We’ll be watching this closely and looking for assurances from the Ministry of Justice that the portal is fit for purpose from day one. If ministers cannot guarantee this, then they will need to swallow their pride and move the implementation date back.”

“The public have no idea what’s coming their way—our own research showed just 18% knew of the reforms—and they will be in for a shock at how the government has put insurers’ interests ahead of their own for what we all know will turn out to be an illusory reduction in insurance premiums.”

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Mark Dugdale is the editor of Claims Media. Mark welcomes articles, letters or feedback from readers and can be reached via mark.dugdale@barkerbrooks.co.uk