News focus: Collision course over PI discount rate

Blink and you seemed to miss her tenure as lord chancellor, but Liz Truss was at least able to tackle an issue ducked by her five immediate predecessors.

A so-called ‘discount rate’ was set at 2.5% in 2001 to reflect expected earnings from investments. It was parked for 16 years, before Truss sent shockwaves through the insurance and legal sectors by setting a new rate of -0.75%, turning the discount into a top-up.The matter itself was simple: what compensation should injured people receive when they are awarded damages by the courts, and should we consider how they might invest their money when assessing that compensation?

A year on from that tumultuous day, what has actually changed? And is animosity between claimant and defendant parties even greater than before?

James Dalton, director of general insurance policy at the Association of British Insurers, recalls the morning of 27 February 2017 vividly. One online wit portrayed him recoiling in horror as the new figure was announced and this turned out to be close to the truth. ‘That was a pretty accurate assessment of what the situation was like,’ he told the Gazette. ‘We were shocked at the scale of the change; we’d anticipated the rate would go down but absolutely not into negative territory.’

Personal injury lawyers responded rather differently. They had argued for 16 years that injured people were being under-compensated, but each time they thought the government might concede they were stonewalled. Finally, there was vindication. ‘It was a bit surreal,’ says Brett Dixon, president of the Association of Personal Injury Lawyers. ‘I remember looking at [the revised rate] and thinking the minus was a typo. We knew people were being under-compensated and there was a fear factor for victims that their money had to last. For them there was such a feeling of relief.’

The response of the insurance lobby, which had always prided itself on good relations with government, was eye-catching – it dubbed the decision ‘crazy’ and took to news networks to say so. The next day, the insurers were invited into Downing Street for a meeting with chancellor of the exchequer Philip Hammond. The claimants’ champagne was on ice: was this whole thing a stitch-up?

‘It’s not like we rang up the chancellor and said “can we come in and see you”?’ says Dalton. ‘It doesn’t take a rocket scientist to know we were going to say we were disappointed, but the chancellor didn’t clear his diary so the nasty “fat cats” could waltz in. The reality is there was a planned government announcement, they knew our likely reaction and so for government it was a good idea to meet.’

Billions of pounds were at stake, argued insurers, and the ultimate fall guys would be premium-payers and the NHS.

But do the apocalyptic predictions really stand up? Allianz UK last week reported operating profits in the 2017 year increased 26% to £121m – although it stated the profit figure would have been £22m higher but for last year’s reform.

Direct Line estimated its profits would fall in 2017 by between £215m and £230m after reinsurance recoveries. Preliminary results announced earlier this month indicated profit before tax for 2017 will be £540m – up from £353m last year.

Direct Line’s share price, which slumped by 28p to 338p per share on 27 February 2017, stood at almost 390p last week.

Dalton insists that insurers took a hit from the decision and have had no choice but to increase car insurance premiums. ‘They are continuing to make provisions in their reserves for the -0.75% rate. They are putting hundreds of millions on to the balance sheet to accommodate that,’ he said.

‘We continue to be transparent and our quarterly tracker shows premiums continue to increase – there is absolutely no doubt that has got to do with the discount rate, and other factors.’

Claimant lawyers, meanwhile, accuse insurers of responding to the change by simply refusing to settle on the revised numbers.

Dixon says: ‘The biggest shame is you have seriously injured people whose settlements are being delayed. You see all kinds of strange applications to revisit or extend a prognosis on an issue you’ve never had before to put off a trial date. Every single [lawyer] you speak to with more serious work has a story. It’s happening on quite a wide scale.’

Dalton counters: ‘This is about anecdote versus analysis – I would like to see some evidence that it’s the case but I don’t believe it is. Insurers will want these claims off their books – they have had, in some instances, claims on their books for five years with reserves attached and they want them to settle.’

Last September, following a consultation over the spring, Truss’s short-lived successor David Lidington proposed a new system that would be likely to result in a return to a discount. Both sides of the argument now faced the same problem: more uncertainty.

The government has since made noises about imminent action but there are fears the issue has been booted back into the long grass and will be squeezed out by the demands of Brexit legislation.

Dixon says the ideal scenario would be to leave the rate as it is. The current calculation, which is based on claimants investing in low-risk gilts, is a ‘benchmark’ for finding the right damages, and he says insurers are disingenuous to suggest otherwise. ‘The reality is that the insurers focus on the idea you can’t use gilts as no one invests in them. But this is a mechanism whereby a court can calculate damages by investment behaviour.’

Claimant lawyers warn against returning to a time when injured people were forced to take a risk on their money and even to cut back on the care they bought.

Would periodical payment orders (PPOs) – regular payments rather than lump sums – be a solution? Insurers have told the Gazette that claimant lawyers were reluctant to offer them before 2017 because financial advisers – sometimes with business  links to the lawyers – did not benefit from such arrangements. Claimants insist insurers have refused to even consider PPOs when they have been suggested, as they are keen to avoid long-term liability. Either way, they are rare and becoming rarer: according to the Institute and Faculty of Actuaries, almost 90 PPOs were agreed in 2012, but just over 30 in 2016.

Both sides may crave clarity and immediate guidance but the nature of ministerial whim means there is a sense of apprehension about asking too noisily. They can but wait – and hope.