Ogden rate changes must protect claimants, say MPs

Changes to the Ogden discount rate must ensure that claimants get full compensation, MPs have urged.

The government must gather evidence about how claimants actually invest lump-sum damages and whether investment covers their future losses, while ensuring adequate safeguards to prevent under-compensation of the most vulnerable claimants, according to a report from the House of Commons Justice select committee.

Published today, the report contains recommendations ahead of legislation from the government that will set new rules for determining the Ogden rate, which sets the discount at which lump sums are paid to claimants to allow for future investment gains.

Earlier this year the government cut the Ogden rate from 2.5% to minus 0.75%. The rate was calculated using the returns from very low risk index linked gilts. Facing a massive increase to their compensation payouts, insurance companies complained that these ultra-safe investments were unrealistic as benchmarks, and that the government should revise the rate using more realistic investments.

The government has said it will introduce legislation to revise the benchmark and set up a committee to oversee future rate changes. It said it expects any new rate to fall between 0% and 1%.

Committee Chair Bob Neill MP said: “Setting the discount rate is much more than a technical decision. It is about how we as a society treat people who have been seriously injured, whether through medical negligence, road traffic accidents or by other means. It involves balancing the interests of claimants with defendants, and also balancing the social costs of increased clinical negligence payouts and increased insurance premiums with protecting the interests of vulnerable claimants.”

The report also recommends that legislation should require the expert panel and the Lord Chancellor to consider whether to set different discount rates for different periods of loss or different heads of damage.

“We welcome the committee’s scrutiny of this vital piece of draft legislation,” said Biba executive director Graeme Trudgill.

“Currently, a Discount Rate  of minus 0.75% suggests  that claimants lose money from investments, rather than them attracting an investment income. This is clearly not the case and underlines why this legislation is urgently needed,” he said.

“The committee has indicated it would like to see more evidence of how claimants invest their damage awards if the government wants to maintain the objective of 100% compensation – something which is fundamental to the principle of indemnity in insurance.

“While more evidence may be useful to provide confidence that claimants will not be under-compensated, we feel that the Government already has much evidence to demonstrate that in the real-world, claimants do not lose money from their investments. Any further delay would exacerbate the wider social impacts that a change to a negative rate value has already had.”

Trudgill pointed to analysis of 1,000 investment scenarios by the Government Actuary Department that found the claimant was over-compensated in 95% of cases.

“In our evidence to the committee, we emphasised the impact that a minus discount rate has upon our members’ customers, namely significantly increasing premiums, particularly for young drivers. Following the rate change, there has been a 10% increase in the rate of uninsured driving claims,” Trudgill said.

“Furthermore, standard liability limits of cover, which were arranged when the discount rate was 2.5%, may now be insufficient – putting firms, specifically small businesses, at risk of underinsurance and bankruptcy should a significant liability claim arise. We suggest customers who are concerned should speak to their insurance broker to review their limits.

“We look forward to government identifying a suitable bill to take these clauses forward at the soonest opportunity,” Trudgill said.

ABI director general Huw Evans also greeted the report.

“We welcome this report which recognises the need for a system which balances the interests of claimants, customers and taxpayers,” he said.

”The government’s reform proposals achieve this by ensuring that the rate reflects claimant investment behaviour, a fact supported by evidence from financial experts supplied to the government. Further evidence would only become available if claimant advisers were willing to provide it – to date this has not been supplied. For good reason no other comparable country in the world has set a rate this low, and it is widely recognised that reform is vital. It is time to press ahead in the interests of getting a system that is fair for everyone.”

“The justice committee is to be applauded for reminding the government that it must consider the needs of injured people before changing the way the discount rate is calculated,” said Brett Dixon, president of the Association of Personal Injury Lawyers (APIL).

“The committee has pulled no punches in challenging the arguments and assumptions made by the government and the insurance industry, and the evidence on which those assumptions are based,” he said.

“All reform should be evidence-based and we welcome the fact that the committee is holding the Government properly to account.

“The government must now stop and take time to gather robust evidence about the impact of its proposed changes on injured people. It must not be pushed into baseless reform by the vested interests of the insurance industry when the welfare of catastrophically injured people and their families is at stake.”  

Not everyone welcomed the report however.

“The main consequence of the report appears to be the prospect of yet further delay before any change in the rate,” said Mark Burton, partner at law firm Kennedys.

“The committee recommends fresh evidence regarding real-world investment behaviours and a slower first review, requiring a decision of the full expert panel rather than just the Lord Chancellor, and involving mandatory consideration about whether to move to a mixed-rate methodology rather than the present single rate approach,” he said.

“The MoJ consultation response showed that the current rate of minus 0.75% overcompensates and is based on unrealistic methodology. It will therefore be a source of considerable frustration to compensators that the reform process looks set to drag on for a long while and be prolonged further by the Committee’s intervention, especially as relevant evidence was submitted fairly recently for the consultation phase and we now appear to risk starting over again.”