The International Underwriting Association has proposed reforms to the UK discount rate, used by courts to calculate lump sum compensation fair awards in personal injury cases. A dual rate model, featuring both short and long-term rates, would provide fairer and more accurate compensation payments, the association argues. This would provide claimants and re/insurers with greater certainty over agreed settlements.
Introducing a dual rate system allows different rates to be applied depending on whether an award is for a relatively short or long period and thus exposed to different levels of investment risk.
Dave Matcham, chief executive of the IUA, said: “The well-being of claimants is vital and we need a system that provides compensation in a correct and just manner. Most who receive a lump sum award invest, but rates of return can be quite different depending on the length of an investment.
“We believe, therefore, that an opportunity to apply a different rate for the part of a claimants’ award beyond 10 or 15 years would be much better. This would allow for short-term investment risks and financial market volatility to be more easily considered.”
Responding to a Ministry of Justice consultation exercise, the IUA stated that a more flexible dual rate system would lead to greater long-term stability in the size of awards. It would allow insurers to operate with greater confidence in a complex marketplace that involves the settlement of individual personal injury losses worth tens of millions of pounds.
Insurance solvency requirements necessitate companies to undertake careful balancing of large loss reserves. Any change in the discount rate can have a major impact on the operation of the insurance market. A single rate model is less able to cope with changes in circumstances. Introducing a dual rate system, with a stable long-term rate, would limit the need for more frequent and dramatic rate adjustments.
Mr Matcham added: “The approach we are advocating will bring forward a more equitable structure. It would result in a more balanced environment in which insurance and reinsurance firms can operate and the needs of claimants are met more accurately.
“By lessening the impact of large swings in reserves that can be caused by changes to the discount rate we will see a more stable, understandable and predictable environment for claims settlement.”