Large personal injury awards, qualified by the Ogden discount rate, are creating uncertainty for insurers' resource planning. Christopher McKevitt asks if there is an alternative
Half of 1% in anyone's book doesn't sound like much. But the Lord Chancellor's decision, 16 months ago, to shave the discount rate used to calculate future damages in major injury claims saw the insurance industry collapse into paroxysms of despair, while quickly adjusting reserves to shore up solvency.
The words `nail' and `coffin', already familiar to those trying to maintain some semblance of reality in the mayhem that is becoming Britain's claims culture, were in the air rather more frequently than usual. When the Lord Chancellor intervenes, it's perhaps the actuaries and the lawyers who emerge from the dust.
So, it's time that alternatives to the current system of legal proceedings culminating in a damages calculation using the Ogden Tables need to be considered afresh.
Over the last five years the Ogden discount rate has been reduced from between 4% and 5% of the final lump sum, to 3% and then last year to 2.5%. While that's good for the claimant, who has to worry less about his return on investment, it means more expensive premiums for everyone.
Frequent rate reviews leave insurers struggling to plan their finances into the future and wondering which fund manager worth his salt can't do better than 2.5%.
Allianz Cornhill divisional claims manager Roy Hebburn says: "The use of actuarial tables in major future loss personal injury cases is not the problem. What has been a problem is the 2.5% discount rate applied, whereas compensation is invariably invested at a much higher rate."
Meanwhile, the industry is asking if the mood is now right to move towards something different. Can lump sums be replaced? And, if so, with what?
Forum of Insurance Lawyers (Foil) president Tim Wallis believes insurers have to understand claimants better. He believes that 95% of actions could be resolved using far cheaper structured settlements.
Asked why structured settlements are not part of the embedded landscape of personal injury litigation already, he has sharp words for the industry.
"I think there was a reluctance to take structured settlements on board because they were a very different way of doing things."
Testing the law
Wallis says that if an alternative is to be successful, the industry has to be more willing to unite and present collective ideas to the government and the public.
There is evidence, he says, of large insurers testing law all the way to the House of Lords in moves that not only serve the interests of their own balance sheets, but also those of the industry's other stakeholders, notably its premium payers.
Consultant PricewaterhouseCoopers (PWC) has a long-time association with the insurance industry. PWC insurance solutions consultant Paul Mahon will shortly publish an analysis which includes an examination of alternatives to Ogden. In the meantime, he says that rehabilitation has to have a greater role into the future.
"Scandinavia and the US are the two most commonly quoted examples of systems with better rehabilitation percentages than the UK and consideration needs to be given as to why our system is not as effective."
Mahon talks of the need for commitment from insurers and lawyers as, too often, the time invested in trying broach alternatives to lump sum settlements prove fruitless.
"It requires a great deal of focus, and at times persistence and persuasion, to achieve a favourable result for both sides."
Hebburn says that new compensation structures would require suitable products from the annuity markets and active encouragement for their use by the courts.
"What we do foresee is much greater use of bottom-up structures. These will reflect income stream needs and the capital sum will be irrelevant to the claimant," he says.
In their simplest form, these compensation payment methods involve the calculation of the damages being measured against an assessment of the claimant's future needs. So rather than a lump sum simply being split across a predicted life expectancy, a certain amount is paid regularly for the rest of the claimant's life.
Undoubtedly, Ogden, in itself, does not disconcert the industry. What causes serious problems is the reviewing of the discount rate which makes reserving difficult and causes knock-on pain for premium payers. Currently, there is no shortage of ideas. The crucial task for the industry and its many and varied stakeholders is to move collectively and uniformly. It's a challenge that today's negative climate and a deep intake of breath might just pave the way towards. N
How the Ogden tables work
The Ogden tables are used in cases of large compensation sums, to cater for the part of the lump sum apportioned for medical care and loss of future earnings.
They enable the courts to arrive at a multiplier to determine how many years of compensation are to be represented by the lump sum.
Crucially, this multiplier must account for the net return claimants could expect to receive from sensibly investing their award. To allow for this, a deduction, or discount rate, as it is termed, is typically made.