LMA Proposes new Discount Rate Process

London, United Kingdom – 11 May 2017 – The Lloyd’s Market Association (LMA) has called for major changes to the way the Personal Injury Discount Rate is set. The Discount Rate is currently set with reference to Index Linked Gilts, rather than the balanced investment portfolios widely used by claimants. This discrepancy will inevitably lead to over-compensation of claimants.

The LMA is also concerned the rate is set solely by the Lord Chancellor under powers granted by the Damages Act 1996; a process that the LMA believes is inadequate.

David Powell, Non-Marine Manager at the LMA said: “The Discount Rate should be based on a realistic investment vehicle, to make it more accurate, reducing the risk of over-compensation. We are suggesting using the average yield of a model low-risk portfolio, better reflecting what claimants actually do with their money”.

In its response to the Ministry of Justice’s consultation, the LMA has suggested a model portfolio should be agreed by a suitable panel of experts and published for transparency. The Discount Rate should be reviewed periodically to reflect material changes in the yield of the underlying portfolio. The LMA also advocates measures to smooth the effect of short-term economic volatility, such as limiting rate changes to one per year, and a maximum shift of 100 basis points at a time.

Powell added: “A new process would provide greater certainty and transparency, reducing the risk of unexpected and significant changes in the rate.”

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Notes to Editors
The Discount Rate (or Ogden Rate) refers to the assumed rate of return that claimants will earn when they invest a lump sum award of damages. The law allows insurers/compensators to take expected future returns into account and therefore reduce the size of the initial lump sum.  

The rate was recently reduced to -0.75% (from +2.5%), the first change in 16 years – a controversial and price-sensitive move, costing liability and motor insurers millions overnight in reserve increases. 

The discount rate is now negative because it reflects the short-term performance of the key indicator investment; Index Linked Gilts (ILGS) that are currently losing money. NB Linking the rate to ILGS was set out in Wells v Wells (1999. The MoJ as recognised that the rate setting process is problematic and has issued a formal consultation on how the law might be improved.  

About the Lloyd’s Market Association (LMA)

Formed in 2001 and located in the heart of the Lloyd’s Building in the City of London, the Lloyd's Market Association represents the interests of the Lloyd’s underwriting community. All underwriting businesses at Lloyd’s are members, together managing gross premium income of around £30billion per annum. For more information visit: www.lmalloyds.com.