The new APIL Fools' Day perhaps?

On the back of what has been an extraordinary period with things we could never have predicted twelve months ago (Leicester winning the Premier league and then losing their manager, the Country voting for Brexit and of course Donald Trump) a reflection on yesterday morning’s announcement (27th February) from the Justice Secretary is yet another reason to ‘expect the unexpected’.

It is fair to say that there is still a state of shock reverberating around the industry following what can only be described as an insane and illogical decision to reduce the discount rate to minus 0.75%. So much so that you could be forgiven for thinking it is April the 1st – or perhaps (pardon the pun) APIL the 1st?

The truth is, the impact of the decision, I am afraid, is all too real and alarming.

Now, I can go into detail on the tables and what this means, but let me put a sense of perspective on the situation. Put simply, last week a 20 year old claimant with a single 24/7 carer claim had a value of say £6m to £7m; this week it’s worth close to £14m. That’s the change in a nutshell. Same claim, same needs, nothing has changed materially with the claim – except of course the value – literally overnight.

This is even more extraordinary when you consider that:

1. We were already double the cost of similar claims in any other country in Europe;
2. None of the claimants receiving the lump sum windfall will end up investing in the ILGS upon which the decision is based upon; and
3. The decision flies in the face of the Government’s stated desire to reduce the cost of insurance premiums.

It is clear that the impact of increased compensation paid to victims comes at a price for society, either through increased insurance premiums or taxation and against this backdrop it is disappointing that the Lord Chancellor has declined to engage in a sensible dialogue around the appropriateness or otherwise of the methodology.

Taking the case I mention above: The claimant’s investment of a lump sum settlement in a defensive portfolio that almost guarantees a 4% return after charges, would provide  just under £5m of growth over a ten year period, even after allowing for a typical £150k a year for care. This cannot be a reasonable and sustainable system of compensation.

More importantly, the decision goes against the basic principle of insurance and the appropriate measure of loss – to put the claimant back in the position he/she was in prior to the incident. Whilst claims of the severity that are impacted by this decision are unfortunate  and require the right level of compensation, it surely cannot be right that once the damages are assessed, a calculation that in no way reflects how claimants actually invest their compensation is applied to artificially inflate the damages to a level that far exceeds what they would normally receive.

Over the coming days, weeks and months we will of course be lobbying hard and assisting our clients to digest the decision – no matter how permanent or transitional the new rate turns out to be. We have, for instance, created an easy to use Excel tool that can be downloaded from here which shows the swing from the old rate to the new rate (note we have dropped the term ‘discount’ from this since it is no longer is a discount!) helping to put a number on what the practical implications are. I still find it hard to look at the table and see the multiplier going up a whopping 2.77 times more than what it was for a 20 year old claimant!

The longer term impact will, of course, need careful thought and consideration before embarking on a strategic response. It stands to reason that if this is the environment we are now in, then all insurers and compensators (lest we forget the £1billion impact on the NHS!) will want to review their entire methodology for dealing with these claims, both during any immediate consultation period and beyond.

We will of course be working with our clients to help them where we possibly can and of course the Keoghs Market Affairs team will continue its lobbying work on this issue over the coming months.

Indeed, to really focus our efforts on what is a seismic decision for the industry, we have instigated the creation of a cross-discipline team appointed to look at how we respond to the rate decision and how we can further offer guidance and support to our clients.

We will provide more details on this in due course, however now is the time for careful reflection and perhaps just a little time to shake our heads in disbelief, before embarking on tackling the challenge that the Government has landed on the industry.