Personal injury discount rate: a single rate or multiple rates?

On 3rd November the Ministry of Justice (MoJ) confirmed it will commence a ‘call for evidence’ of the pros and cons of dual or multiple discount rates for calculating future losses in serious personal injury claims in England & Wales.

Although the MoJ does not indicate a preference for moving away from a single discount rate, it is realistic to assume that the analysis of the evidence it receives in response to this exercise will inform government thinking in the run-up to the next formal review of the current statutory rate which, under the Civil Liability Act (CLA) 2018, must begin by summer 2024.

MoJ is arranging three round table events on this topic towards the end of this month, each of which will involve around 25 industry professionals. It seems likely that MoJ will release materials that would help shape these discussions and provide an opportunity for more formal responses to be submitted.

To date, a single discount rate has applied in England & Wales at common law and subsequently under the Damages Act 1996 and the CLA 2018. It should however be noted that the provisions of the CLA would allow for dual or multiple rates. It does not necessarily follow that dual rates would either cost less or more than the present single rate: the precise financial impact of a move to split rates would depend on the method of splitting and on the individual levels of each part of the split rate.

During the first rate-setting exercise under the Act in 2019, the Government Actuary provided outline analysis of methodologies that might be adopted if dual rates were to be implemented. The Lord Chancellor at the time decided that there was not enough firm evidence to take those ideas forward and committed to further consultation. The new ‘call for evidence’ some three years on looks to be the fulfilment of that pledge.

Without sight of any material, it is difficult to formulate views. However a proper consideration of the issues raised will need to draw not just from claims expertise but also from skills in pricing and reserving in motor and casualty lines. The following broad points would look to be among the key matters to consider in responding to the MoJ.

• Practical effects of split rates on valuing claims, making offers and conducting settlement negotiations?
• Approaches to splitting rates, whether by period of loss, head of loss or any other criteria?
• How split rates might be catered for in Ogden Tables and in proprietary claims valuation software?
• The particular actuarial approaches that might be adopted to ensure rigour in valuing claims?
• Potential benefits and disadvantages for claimants, defendants, (re)insurers and other indemnifiers?
• ‘Upstream’ issues beyond claims valuations, ie the impact of split rates on pricing, reserving, capital adequacy and re-insurance programmes?
• Risks of ‘gaming’ behaviours, ie of secondary tactical arguments about which split rate applies to a given head of loss or claim?

Clyde & Co is seeking representation at each of the MoJ’s November 2022 round tables sessions and will be arranging our own briefing events (very probably in remote format) not long after those to help you engage with and respond to this important call for evidence.