Discount Rate Announcement

The Lord Chancellor, Liz Truss yesterday (27 February) announced the change to the discount rate. The previous rate of 2.5% was set in 2001 in a very different economy. The conclusion of a review that started in 2010 is a reduction to -0.75%.

The Lord Chancellor’s reasons can be found here and the statement announcing the review includes a promise that the government is committed to ensuring that the NHSLA will have “appropriate funding to cover changes to hospitals’ clinical negligence costs” . Given the reduction in investment yields since 2001, it seems difficult to argue against the principle that there should be some reduction. However, the precise figure chosen has been branded “crazy” by the ABI in a statement predicting increased motor and liability insurance premiums and a £1billion increase in compensation payable by the NHS. The move has also prompted the CEOs of 15 insurers to meet the Chancellor asking him to intervene. Will the new discount rate wipe out the insurance premium savings promised after the MOJ’s whiplash reforms announced last week (and addressed by Ian Miller’s post on this blog)?

The announcement also includes a promise that a consultation will be brought forward by Easter to consider “whether the rate should in future be set by an independent body; whether more frequent reviews would improve predictability and certainty for all parties; and whether the methodology – which in effect assumes that claimants would invest only in index-linked gilts – is appropriate for the future.”