APIL discount rate review could force decision from Clarke

The day of reckoning is moving closer for insurers after the Association of Personal Injury Lawyers (APIL) launched a judicial review of chancellor Ken Clarke’s stonewalling on whether to alter the discount rate.

The government will now almost certainly challenge APIL at the High Court and the result should be known in the summer.

If APIL wins, Clarke will be forced to make a decision on whether to alter the discount rate. Even a 1% reduction in the discount rate, from 2.5% to 1.5%, could costs insurers millions, especially at a time when lump sum payments are ballooning.

Clarke's resistance

However, Clarke will be loath to trim the discount rate as that will be followed across all government departments and that could mean more costly bills for the NHS when it settles claims.

Stephensons head of litigation Andrew Welch says: “Judicial reviews tend not to be successful - put it this way, they are far from a guaranteed result. APIL will have to prove that the chancellor has acted irrationally by not making a decision sooner.”

The discount rate is used to calculate the amount deducted from an injured person’s compensation to account for any income he may receive from investing his damages. The discount rate was set in 2001 when yields on gilts were calculated at 2.5% - but APIL argues that yields have collapsed over the last three years to less than 1%.

Tough to prove

Insurers argue that investment returns should be viewed across 20 to 30 years, and it’s highly unlikely that interest rates will remain that low over such a long period of time.

“I would imagine that if the judicial review is successful, the lord chancellor would consider both arguments carefully,” Welch says.

So are insurers powerless bystanders in all this?

Welsh says that in theory, insurers could launch their own judicial review if the lord chancellor reduces the discount rate, but they would have to prove that the chancellor acted irrationally, and that would be very difficult.