Today is six months on from the announcement by then Lord Chancellor David Gauke on 15 July 2019, that the discount rate in England & Wales would be re-set, using new powers in the Civil Liability Act 2018, at -0.25% with effect from 5 August 2019. In the ordinary course of things this rate should apply for five years and should then be reviewed. What has or has not happened in the six months since the Lord Chancellor’s decision?
Some parts of the market had to strengthen case / portfolio reserves. Those carriers who had changed their reserving approach to using 0% (or a modestly positive rate) before last July needed to inject more funds into reserves because the rate actually set was lower than their operating assumption.
The rate-setting decision will not be challenged. Some voices in the insurance sector were quick to suggest either that the Lord Chancellor’s decision might be unlawful (perhaps on the basis that it expressly moved away from median compensation, although Gauke had clearly signalled his intention to do just that much earlier in the legislative process) and/or to assert that it cut across conceivably reasonable expectations of the prescribed rate lying between 0% and 1%. Despite this, the three month period in which judicial review proceedings would need to be initiated passed without any such action being taken.
A single rate was set. Nevertheless, dual or split discount rates remain a possibility and it appears likely that some form of in-depth consultation might be carried out by the government over the medium term. If so, we would expect to see its results informing the next rate review, i.e. five years out, rather than precipitating an out-of-cycle standalone review.
New Ogden tables emerged. Helpfully, the Government Actuary’s Department was able to publish updated tables including columns of multipliers at -0.25% before that rate took effect on 5 August 2019. At the time of writing, work towards an entirely new edition of the tables (the eighth) is reasonably well-advanced and we would expect it to be published later in this quarter or early in the second.
Scotland didn’t follow suit. The rate-setting legislation in Scotland is different, although it does closely involve the Government Actuary in the process as in England & Wales. Two elements of the notional investment approach in the Scottish legislation are more conservative than south of the border. The rate in Scotland was, therefore, expected to be lower, which was confirmed when the new rate of -0.75% took effect on 1 October 2019.
Northern Ireland maintained a watching brief. The 2018 Act does not extend here, meaning that the prescribed rate remains, at least technically, at 2.5% based on the rate-setting instrument from 2001. It is understood that the Department of Justice is currently taking expert advice on rate-setting and will communicate further in due course. In practice, it appears over the last six months that parties have taken pragmatic views on the point. The courts in Northern Ireland have not yet been asked to exercise discretion afforded under section 1(2) of the Damages Act 1996 to vary the 2.5% discount rate to a “more appropriate” rate, although this may happen in the coming months.
We’ll do this all again in 2024/25. The 2018 Act requires the Lord Chancellor to “review of the rate of return … within the 5 year period following the last review”, although he is free to decide “when, within the 5 year period following the last review [the next review] is to be started.” He is required to complete this later review within 180 days of starting it. These periods mean there is some risk of the review starting in summer 2024 but not being completed until early in Q1 2025, which might add some uncertainty to insurance and reinsurance renewals around year end 2024. The Scottish legislation includes the same five year review period, although the precise trigger date may differ and only 90 days are allowed to complete its review.
Start getting your data in order well before then. Section 11 of the 2018 Act provides the framework by which insurers must report to the FCA on the effects of the discount rate change. The reporting obligation is widely drafted, with further detailed regulations due to be confirmed in the coming weeks or months. The regulator must then to report to Treasury, which itself has “a period of one year beginning with 1 April 2024 [in which to] prepare and lay before Parliament a report” on the effects of the Act.