A consultation on the need for changes to the way in which the discount rate applied to lump sum personal injury compensation payments is set was interrupted by the UK general election. A new rate of minus 0.75%, down from 2.5%, came into force on 20 March in England and Wales and 28 March in Scotland this year, effectively increasing compensation awards in order to reflect assumed loss of value.
The change, which was the first since 2001, was criticised by the insurance industry, which believes that it reflects a flawed method for setting the rate and ultimately over-compensates claimants.
Now, recently-appointed City minister Stephen Barclay has confirmed that the government is considering the responses to the consultation exercise, and is listening to the industry's concerns.
"We want to make sure that the way the rate is set is put on the firmest possible footing in future, so that we have a better and fairer system for claimants and defendants," Barclay said, in a speech to the Association of British Insurers (ABI).
"In doing so, we will keep true to the 100% principle: that a claimant is paid no less than they should be, and no more. In short, we have been consulting on moving away from a mechanism that has grown outdated and, with negative returns on interest-linked gilts, lost its connection with the way people invest in the real world," he said.
The 1996 Damages Act requires that those receiving lump sum compensation awards are treated as 'risk-averse' investors, reflecting the fact that they will be financially dependent on that lump sum for perhaps the remainder of their life. The discount rate, which is applied by the courts to ensure that the actual amount received by an individual reflects the return they can expect to earn if they had invested the payment, is therefore linked to returns on index-linked gilts as the lowest-risk investments.
The Queen's Speech confirmed the government's intention to take forward a number of measures which will potentially affect the insurance industry. These include an Automated and Electric Vehicles Bill, which will among other things require compulsory motor vehicle insurance for automated vehicles; and a Civil Liability Bill, which will crack down on fraudulent whiplash claims with the intention of bringing down motor insurance premiums.