Insurers have been reminded that an increase in the U.K. personal injury discount rate is not a done deal and that even if it is changed, the so-called Ogden rate may be set lower than expected after a committee of members of parliament criticized the draft legislation underpinning the potential change.
The Ogden rate was cut to minus 0.75% earlier in 2017 based on a scenario of claimants investing their payouts in index-linked government securities, which had been loss-making for a number of years. Insurers argued that this methodology was flawed because it did not reflect how claimants actually invest their lump sums. As a result, a draft legislation was then published that aimed to set the discount rate with reference to a basket of "low-risk" investments.
In a Nov. 28 report scrutinizing this draft legislation, the House of Commons Justice Committee — which holds the Ministry of Justice to account — said it was "legitimate" to consider changing the rate-setting assumptions to reflect how claimants invest their lump sums. But it added: "The evidence currently presented by the government concerning claimant investment behavior is thin."
The report called for "clear and unambiguous evidence" on this point before any changes to the current legislation are made, while the committee also recommended that the Lord Chancellor, David Lidington, consult an expert panel when changing the rate, which could add months to the process.
In addition to flagging up the potential delay, the committee's work casts doubt on whether the new discount rate will fall within the zero percent to 1% range that Lidington suggested when announcing the draft legislation on Sept. 7. When questioned by the committee at a related Nov. 1 hearing, Lord Keen of Elie, the Ministry of Justice spokesman for the House of Lords, warned against treating that range as an estimate of where the rate would fall, saying it was "an assessment of the direction of travel of the rate."
He added, "With the benefit of hindsight, it is perhaps unfortunate that the figure was there."
"[Changing the rate] seems like a fairly standard political procedure, but we're clearly in quite non-standard political times with Brexit and a minority government," Rob Treen, senior consultant in the actuarial consultancy part of broking and consulting group Willis Towers Watson Plc, said. "The industry needs to be aware that there is a real possibility that the rate does stay at a negative or at a lower number than they are hoping."
PwC head of general insurance, Mohammad Khan, agreed saying: "We are clearly in an uncertain political climate. I think there is a significant nonzero probability that the bill might not pass. I think insurance companies are looking at that and taking that into account when they think about their year-end results."
Even before the committee's Nov. 28 report, there was an indication that the rate would not change until at least the end of 2018. The Association of Personal Injury Lawyers — a critic of the insurance industry and supporter of the rate cut to minus 0.75% — said in its weekly newsletter dated Nov. 2 that, according to civil servants it had met with, "it was likely that the rate would be reviewed and subsequently changed by the end of 2018/start of 2019."
The Justice Committee's recommendations make this more likely. While stressing that any prediction would be highly speculative at this stage, law firm BLM's Director of Policy and Government Affairs Alistair Kinley said gathering more evidence could take "a few months," although likely less than six.
Khan estimated that the committee's other recommendation of having a panel of experts vet the first rate change after implementation of the new legislation would add time to the process, too. "Even if the bill passes, we are going to see quite a large extension — three to six months — before we get an announcement," he said, though he was optimistic that a change to the Ogden rate could be announced before the end of 2018.
It remains to be seen whether the government will take the committee's recommendations on board, though law firm Kennedys suggested that the government would be unlikely to ignore the committee's recommendations outright because doing so can draw criticism as the legislation passes through parliament.
"In practice, most often the government will 'cherry pick' elements to show it is listening, while ignoring the aspects it does not like," Kennedys wrote in a Nov. 30 article.
In response to a written question in the British parliament, Parliamentary Undersecretary for the Ministry of Justice Sam Gyimah said the government would respond to the committee's conclusions within two months of the report's publication. So, it should respond by Jan. 28, 2018, and there is a sense that it is not shying away from changing the discount rate.
"There is uncertainty about timing and precise detail, but I don't think there is uncertainty about the government's commitment that it wants to proceed," Kinley said.
The knowledge that the change is on the way is allowing insurers to negotiate a rate above minus 0.75% with claimant lawyers where personal injury cases are being settled out of court, which the majority are.
Shore Capital analyst Eamonn Flanagan said: "What we have discovered is that over the period since the Ogden changes were put in place, the official discount rate is minus 0.75%, but the actual number of claims that have been settled at that figure is very small, if not zero. On the face of it, delays aren't good, but it does feel to me that the market is coming up with a solution."