Let me start with a confession; I used to work for “the Dark Side”. Yes, I started my career with an insurance company, the Norwich Union Fire Insurance Society as it then was, back in 1989. I remember very clearly my induction, as a perhaps naive 20 something, when I was told that I was working for the “Marks & Spencer’s” of the insurance world and that they looked to “pay every claim”. My experience of working for them for 2½ years was positive and I would support that initial claim. Norwich Union then became Aviva in 2002 – a very different animal altogether.
Why do I mention this?
Well, over recent years Aviva has been one of the main lobbyists against claimants and their “drain” on the insurers’ profits. Let me explain.
You may have wondered what all the fuss was about in the national news on Monday when there was general outrage at personal injury claimants (and their solicitors) driving up insurance premiums for motorists and draining the NHS of much needed funds.
It was all to do with the Discount Rate and its long awaited revision. Why am I writing this article on a chronic pain focused website? Well, the level at which the discount rate is set has a profound effect on the level of compensation for future losses in personal injury claims and any claimant suffering with chronic pain which restricts their capacity for work and/or necessitates reliance on others for help with domestic tasks and/or self-care is going to be affected by this change.
What is the Discount Rate?
When a personal injury claim includes a claim for losses that are to be incurred in the future it is usually the case that the Claimant is awarded a sum in damages which has been carefully calculated to include those losses that have yet to be incurred such as future loss of earnings, care, treatment etc.
Receiving a lump sum “up front” is often referred to as “accelerated receipt”. Let’s look at an example.
Mrs P will lose £10,000 per annum in earnings for the next 20 years. At first glance her claim for future loss of earnings is £10,000 x 20 = £200,000. Well, yes, but no. If Mrs P is paid the full £200,000 “up front” she could theoretically invest that money in Bonds or Gilts and achieve a higher final figure over that 20 year term. This breaches the legal principle that damages should put you in the same not a better position.
This is where the Discount Rate kicks in. The Courts and therefore lawyers and insurers use actuarial tables to calculate claims for future loss. These take into account a number of factors which are important in calculating the sum to be awarded to a claimant for future loss, including accelerated receipt. Whilst the tables are updated regularly, the government has steadfastly refused to reduce the discount rate since it was fixed at 2.5% in 2001.
The 2.5% reflects the anticipated growth a prudent investor could achieve on their investment. Of course, since then we have had the banking crisis of 2008, the longest recession in living memory, interest rates approaching zero, Brexit, Trump etc; so many uncertainties that are likely to have an effect on investment performance. Frankly, the only way that a claimant can hope to achieve a 2.5% return on their investment is by investing their damages – their financial security – in riskier investments.
When the Lord Chancellor, Liz Truss, undertook a review, after years of lobbying by claimant representatives, it was eventually announced that a decision would be made. On Monday she announced that the rate was to be reduced from 2.5% to minus 0.75%.
The government issued a statement to say “The law makes clear that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on this lump sum, often for long periods or the duration of their life.”
Conceding the reduction was long overdue Truss added ‘The law is absolutely clear – as Lord Chancellor, I must make sure the right rate is set to compensate claimants. I am clear that this is the only legally acceptable rate I can set.’
The reaction from the insurers was immediate and apoplectic. The ABI raged:
“Cutting the discount rate to -0.75% from 2.5% is a crazy decision by Liz Truss. Claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK. We estimate that up to 36 million individual and business motor insurance policies could be affected in order to over-compensate a few thousand claimants a year”
It should be noted at this point that just one day after the Lord Chancellor’s announcement 15 CEOs of the major UK insurance companies met with the Chancellor of the Exchequer, Phillip Hammond (I’m confused now, what has the Chancellor of the Exchequer got to do with this?) in Downing Street to discuss the Lord Chancellor’s announcement. Isn’t it amazing that the Chancellor of the Exchequer and the CEOs of 15 of the major UK insurance companies were all available for a meeting at less than 24 hours’ notice? Anyone would think this had been arranged in advance!
Following the meeting the ABI announced:-
“Claimants must get the money they’re entitled to following an injury in order to support their future needs.
“It is important that going forward, personal injury discount rates are set at a level that is fair to both claimants and consumers.
“The government will progress urgently with a consultation on the framework for setting future rates, and bring forward any necessary legislation at an early stage.
“The industry will contribute fully to the upcoming consultation, and the government will carefully consider all evidence and arguments submitted.”
This is the insurance sector that have been quite content to sit back and allow the old unrealistic 2.5% discount rate to be applied in the sure knowledge that they were not actually picking up the true bill for a claimant’s future losses. The reality was that the wholly unrealistic discount rate was seeing claimants running out of funds and having no option but to look to the taxpayer to pick up the shortfall through benefits.
In the meantime, we have seen the operating profit of most insurance companies rocketing skyward. Take Direct Line for instance. They have been particularly vocal this week in their criticism of the reduction in the discount rate. In fact, they claim that the change will reduce their pre-tax profit by £230 million. Whilst that is clearly a huge exaggeration, to put that into context, it is interesting that in 2015 they posted operating profits of £520.7 million!
Where does this leave us?
We are currently left with huge uncertainty.
Claimant’s will clearly wish to settle their claims on the basis of a discount rate of -0.75%. Insurers on the other hand will likely wish to delay settlement of claims as long as possible in the hope that the discount rate may be re-visited in early course.
And what about offers of settlement made in the meantime? Offers are pitched at a level designed by the offeror to create risk for the offeree. So how do you pitch them at a time when such a significant factor in valuing the claim remains so uncertain?