IUA and BIBA set out plans for UK Ogden discount rate reform

British Insurance Brokers' Association (BIBA) and the International Underwriting Association of London (IUA) have set out their plans for the UK’s Ogden personal injury discount rate reform in response to a government consultation.

In February the UK’s Lord Chancellor decided to change the Ogden discount rate to -0.75 percent from 2.5 percent. The move forced re/insurers to significantly increase their reserves, impacting profitability.

Since then, the UK’s Chancellor Philip Hammond has agreed to a consultation on the framework for setting future personal injury (Ogden) rates.

The IUA said that the UK discount rate must better reflect investment strategies, be subject to regular review and set by a politically accountable minister.

With respect to the way courts determine lump sum compensation payments for personal injury claims, the association stated that reform of the current methodology is essential.

When the process for calculating the discount rate was last set, establishing a link with Index Linked Government Securities was reasonable and logical, the IUA argued. But poor returns have made such investments unviable and a low risk, diverse portfolio is now more realistic.

Dave Matcham, IUA chief executive, said: “It is clear that the methodology used and assumptions made to set the discount rate are flawed. The current rate of minus 0.75 percent will inevitably lead to overcompensation, which is compounded by the long-term nature of many settlements. A negative real return is assumed not just for year one, but for every year for decades to come.

“It is encouraging that the Ministry of Justice has issued this consultation so quickly, responding to the feedback of IUA companies and other industry representatives. Our members are keen to see a new system that ensures a professional and competitive marketplace capable of meeting the needs of all policyholders.”

The law should also be changed so that the rate is reviewed at set intervals rather than at the discretion of the government. A regular review process, whether every one or three years, would reduce market volatility.

BIBA highlighted the problems with the existing law in its response to the consultation, including a heightened risk of under-insurance in liability classes; the need for insurers to, with little warning, radically change their reserving models and resulting increases in claims reserves; the potential upward pressure on customers’ premiums as a result of expected increases in claims; and concerns around reduced capacity in the motor insurance market.

Graeme Trudgill, BIBA executive director said: “We want claimants to receive fair and just compensation which needs to take into account equitable investment opportunities. It is unlikely that many individuals would seek, or be advised to seek, to invest all of their lump sum payments in index-linked gilts. We believe it is very unlikely that a prudent investor with appropriate advice would receive a negative return on investment.

“Using a deviation against a pre-agreed norm of a basket of low-risk mixed portfolio investments to trigger reviews may present better way of keeping the discount rate current with transitional arrangements to avoid swings in claims adjustment.”

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