LMA proposes new Discount Rate Process

The Lloyd’s Market Association (LMA) has called for major changes to the way the Personal Injury Discount Rate is set. The Discount Rate is currently set with reference to Index Linked Gilts, rather than the balanced investment portfolios widely used by claimants. This discrepancy will inevitably lead to over-compensation of claimants.

The LMA is also concerned the rate is set solely by the Lord Chancellor under powers granted by the Damages Act 1996; a process that the LMA believes is inadequate.

David Powell, Non-Marine Manager at the LMA said: “The Discount Rate should be based on a realistic investment vehicle, to make it more accurate, reducing the risk of over-compensation. We are suggesting using the average yield of a model low-risk portfolio, better reflecting what claimants actually do with their money”. 

In its response to the Ministry of Justice’s consultation, the LMA has suggested a model portfolio should be agreed by a suitable panel of experts and published for transparency. The Discount Rate should be reviewed periodically to reflect material changes in the yield of the underlying portfolio. The LMA also advocates measures to smooth the effect of short-term economic volatility, such as limiting rate changes to one per year, and a maximum shift of 100 basis points at a time. 

Powell added: “A new process would provide greater certainty and transparency, reducing the risk of unexpected and significant changes in the rate.”