Briefing: Discount rate may be first true indicator of insurers’ relationship with new government

By Jon Guy

The new lord chancellor had not even been sworn in before the Ministry of Justice issued instructions for the second review of the personal injury discount rate (PIDR) since the Civil Liability Act came into force six years ago.

The new lord chancellor, Shabana Mahmood, will have 180 days to decide if the rate will change – so the insurance industry will know its fate by 11 January 2025.

The discount rate is a percentage figure applicable to personal injury damages that takes account of victims’ future losses and expenses.

For the past five years, the discount rate has been -0.25%. It had been adjusted from 2017’s rate of -0.75%. Previously, the discount rate had been 2.5% since 2001.

Under the Civil Liability Act, a review of the PIDR must be conducted every five years by an expert panel.

The PIDR has to be set at a level that avoids either overcompensation or undercompensation.

Unlike Scotland and Northern Ireland, England and Wales does not have a statutory formula for the PIDR, so the new lord chancellor will take detailed advice from the Government Actuary’s Department and the Treasury.

Alistair Kinley, director of policy and government affairs at law firm Clyde and Co, said: “We’ve always had a single PIDR in England and Wales and despite the Ministry of Justice exploring potential dual discount rate models in 2023, our current thinking is that a single PIDR model is likely to be retained.

“Dual rates could increase complexity, cost and delay – none of which seems to be in the interests of ensuring fair and timely compensation in severe injury claims.”

Industry and government relationship

The PIDR has long been a thorny issue for insurers and has a huge impact on claims.

At a time when the new Labour government has made it clear that it wants to look at the costs of motor premiums, the industry can only hope that with interest rates in a more healthy position when it comes to investment returns, Mahmood will look to move the rate into the plus rather than minus column.

The PIDR review is also likely to be a litmus test for the insurance industry in terms of how the new government will view the sector.

The feedback at present is that, certainly for the London market, chancellor of the exchequer Rachel Reeves is seen as someone they can do business with. There is also market-wide hope that the new Labour administration will provide a degree of support that its predecessor may have failed to deliver.

Having been elected on a promise of change and to fight for the man in the street, the cost of living will be front and centre for the new government.

Therefore, it is likely that there will be a push to reduce bills of all types, so insurers cannot believe they will be immune.