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UK government confirms changes to discount rate calculation method

The way in which the discount rate applied to lump sum personal injury payments is calculated will be changed in order to "better reflect evidence of actual investment habits", the UK government has confirmed.28 Mar 2018

The Civil Liability Bill, which was introduced in the House of Lords last week, will also put into place more regular reviews of the rate, and establish an independent expert panel to advice the Lord Chancellor on future changes.

The package of measures, which follow a government consultation, is designed to "provide a more balanced approach to compensation", ensuring full compensation for victims of catastrophic accidents while avoiding a repeat of the dramatic changes to the rate of February last year, according to the government.

Insurance law expert Colin Read of Pinsent Masons, the law firm behind Out-Law.com, said that the changes would be "broadly welcomed across the insurance industry".

"Faced with a basket of uncertainties, insurers will welcome predictability in this arena which can make a significant difference to their financial results over the medium to long term," he said.

"The events of February 2017, when the then Lord Chancellor's announcement in the middle of reporting season created such disquiet, is likely to stand as an example of how unthinking government announcements can lead to unforeseen consequences in a key, world-leading UK industry," he said.

The discount rate is a percentage applied by the courts to lump sum compensation awards, in order to ensure that the actual amount received by the individual reflects the return they can expect to earn if they had invested the payment. A new discount rate of minus 0.75%, down from 2.5%, came into force on 20 March 2017 in England and Wales and 28 March 2017 in Scotland, effectively increasingly lump sum compensation awards in order to reflect assumed loss of value.

The change to the discount rate was the first since 2001 and was criticised by the insurance industry, which said that it reflected a flawed method for setting the rate and ultimately over-compensated payments. The way in which the rate is calculated is governed by statute, and is linked to returns on index-linked gilts as 'very low risk' investments. The new calculation method, as set out in the Civil Liability Bill, would instead link the rate to a more diverse portfolio of 'low risk' investments.

The Civil Liability Bill also commits the government to more regular reviews of the rate, with the first due to take place within 90 days of the legislation coming into force. Future reviews will then take place at least once every three years. In addition, an independent expert panel chaired by the Government Actuary will be established to "advise" the Lord Chancellor on future rate changes, although its advice will not be binding on the government.

The original consultation on changes to the way in which the discount rate is calculated was a joint exercise between the UK and Scottish governments, as powers over the rate are devolved. The Scottish government is yet to publish its response to the consultation, although it is due to publish a Damages Bill as part of its 2017/18 programme for government.

The Civil Liability Bill also proposes changes to the system for making whiplash claims, with the intention of bringing down the cost of motor insurance claims. Changes include the introduction of fixed amounts of compensation for whiplash claims, and banning the practice of seeking or offering to settle whiplash claims without medical evidence.