New Discount Rate: ‘0% to 1%’, Lidington Reveals

Yesterday, the Lord Chancellor and Justice Secretary, David Lidington, announced that the new Ogden discount rate, which is used to calculate the size of lump sum damages awards, is expected to be somewhere between 0% and 1%, an increase from (-)0.75%.[i] The change will be proposed in draft legislation with Ministers discussing the issue before a formal Bill is introduced into Parliament.

If this goes ahead as planned, it would bring the updated rate closer to the former rate, as of February (2.5%) and could help to reduce motor insurance premiums, if the insurance industry can afford to lower their reserves.

At present, predicted investment strategy forms the basis on which the rate is set. It has been suggested by some, however, that the negative discount rate has already led to ‘significant overpayment’, inferring that the economic forecasts were wrong.

After having received responses to a Government consultation on the how the rate should be set in the future, Mr Lidington said:

Where they expressed a view, consultees advised that claimants do not invest in very-low risk portfolios such as one entirely comprising index-linked gilts and many suggested that it is reasonable to expect claimants to invest in low-risk portfolios instead ... We want to introduce a new framework based on how claimants actually invest, as well as making sure the rate is reviewed fairly and regularly’.[ii]

The first review will be scheduled within 90 days of the new legislation coming into force, requiring the consultation of the Lord Chancellor, the Government Actuary and HM Treasury. In future, the process will be overseen by an independent expert panel, chaired by the Government Actuary, who will be on hand to assist the Lord Chancellor. It is proposed that this would take place at least every three years.

Reaction from the insurance industry has been positive, with Huw Evans, Director General of the Association of British Insurers (ABI), welcoming ‘a sound basis for setting the rate in the future’. Further, FTSE 100 company, Direct Line, has seen its share price rise by 4% since the latest news surfaced, although their interim profits, published last month, demonstrated that the impacts of the (-)0.75% discount rate had been less severe than feared, in any event.[iii]

We await the circulation of a full draft of the Bill in due course.

In a future edition of BC Disease News we will be providing an analysis of what a discount rate of 0-1% would mean for compensation in mesothelioma claims.

 

[i] Ministry of Justice and The Rt Hon David Lidington MP, ‘Reforms to compensation payouts announced’ (7 September 2017 Gov.uk) <https://www.gov.uk/government/news/reforms-to-compensation-payouts-announced> accessed 7 September 2017.

[ii] Neil Rose, ‘Government unveils new basis for setting discount rate’ (7 September 2017 Litigation Futures) <http://www.litigationfutures.com/news/government-unveils-new-basis-setting-discount-rate> accessed 7 September 2017.

[iii] ‘Insurers toast new discount rate plans’ (7 September 2017 Law Society Gazette) <https://www.lawgazette.co.uk/law/moj-reveals-potential-new-discount-rate-/5062678.article> accessed 7 September 2017.