The government has issued important materials which (i) inform of the discount rate-setting consultation with the Government Actuary and Treasury and (ii) introduce and set out draft regulations by which insurers will be expected to account for savings arising from the provisions in the Act.
Statutory consultation on rate-setting
The Ministry of Justice published the terms of reference (TOR) governing the mandatory statutory consultation with the two other government departments. The documents are very similar and borrow extensively from the text of the 2018 Act.
The TOR issued to the Government Actuary are a good deal more specific on the fine detail of all aspects of the notional investment of damages for future loss. The TOR for the Treasury indicate that it is being asked to take a more macro-level view of the economic context in which the Lord Chancellor must decide on the personal injury discount rate.
There are links to the published versions of both TOR documents in the attached paper. It sets out both TOR side-by-side and in full, highlighting areas of difference and providing comments on particular sections. [The comparative format means the paper runs to ten pages.]
Four other points should be noted with regard to this statutory consultation.
- Narrow consultation. Under the 2018 Act the Lord Chancellor must consult the GA and Treasury and the TOR relate only to that exercise. It is definitely not a wide ‘call for views’ consultation and no other stakeholder has any input.
- Confidential procedure. No materials will be released by the Lord Chancellor or the either of the statutory consultees until the process ends and a rate (or rates) is (or are) set no later than 5 August 2019.
- Subsequent publication. The TORs clearly state that both consultees’ advice “will be published when the Lord Chancellor announces the outcome of the first review”. This statement goes further than what the Act requires of the Lord Chancellor, which is merely that he publishes “such information” about their advice as he “thinks appropriate.”
- Multiple rates? Both TOR refer to the consultees being asked to consider the prospect of multiple discount rates, split by duration of award/loss and to advise the Lord Chancellor accordingly. This does not necessarily mean that multiple rates will be set, but there appears to be more emphasis on this possibility than previously
Regulations about accounting for savings
The MoJ added a section to the legislation in order to address concerns raised in Parliament about providing a mechanism by which insurers would report on savings due to the reforms in both parts of the Act.
Section 11 of the Act thus provides powers to make regulations about the detailed mechanism by which insurers would report to the FCA, which would then report to Treasury. A short consultation, ending on 3 May 2019, has been opened concerning draft regulations to give effect to this.
The arrangements in the draft regulations require insurers selling more than 10,000 annual “third party personal injury insurance policies to individuals” to collate and provide data covering total relevant premiums, gross claims cost as well as mean figures. [The stipulation that the policies are issued “to individuals” appears to limit the scope largely to personal lines business.] Insurers will also be required to provide “counterfactual information”, that being:
“… the total amount that the insurer might reasonably have been expected to pay … what might reasonably have been expected to be the mean of the amounts paid … the amount that the insurer might reasonably have been expected to charge by way of premiums … the mean of the premiums charged … [in each case] if the Act had not been passed.”
The regulations provide that the data must cover the three year period from 1 April 2020 and be provided to the FCA by 1 November 2023.
There is also an option – “a relevant insurer may provide” – to report similarly for either or both of the years beginning on 1 April 2018 and 1 April 2019. Although worded as an option, the consultation paper indicates that the government expects that insurers will report across all five years, on the basis that “insurers who have already priced in some changes in anticipation of the act receiving Royal Assent will want to demonstrate this”. It is likely that this wording reflects the experience of the market moving in 2012/13 before the introduction of the Jackson reforms and the extensions to the Claims Portal and fixed costs rules.
Written by Alistair Kinley, director of policy and government affairs at BLM