Tread carefully with reform, Clarke told

Justice minister Ken Clarke has been urged by the industry not to rush into changing the formula for fixing compensation pay-outs in response to last week’s High Court bid to force his hand on the matter.

The Association of Personal Injury Lawyers (APIL) launched a judicial review of what it calls the lord chancellor’s failure to organise a timetable for the review of the discount rate for lump-sum compensation payments. APIL chief executive Denise Kitchener said the move was designed to prevent the review being kicked into the long grass. “Injured people in some cases are undercompensated by hundreds of thousands of pounds. It is an unacceptable situation that must be addressed without delay.”

But law firm Weightmans head of large losses and technical claims David Holt warned: “It is essential that the lord chancellor has all the relevant information before him when he considers his position.

This should include an understanding of how seriously injured claimants actually invest their compensation.”

Insurers get a discount rate to counter the fact that claimants receive investment returns from their payments. The current rate of 2.5% was based on yields generated by index-linked government gilts. But since this was calculated in 2001, falling interest rates and investment returns have had an impact on payments to claimants.

The ABI has written to Clarke to warn him that any cut in the discount rate will increase compensation payments, raising customers’ premiums. It has also told Clarke there is no evidence the current discount rate has led to claimants receiving insufficient compensation.

AXA commercial claims and underwriting director David Williams said the far-reaching ramifications of any changes to the rate needed to be weighed up carefully. “It could have a massive impact on major losses, and private motor has enough problems,” he said, adding that a cut would also increase the reserves insurers would have to hold under Solvency II.

Forum of Insurance Lawyers president Tim Oliver said the rate could not be rejigged in response to short-term fluctuations in interest rates.