Articles - Personal Injury Discount rates next up is England and Wales

 Richard York-Weaving, Senior Consultant and Ed Harrison, Partner at LCP

 Based on the typical proportions of costs affected by the discount rate, we estimate that this would translate to reductions in motor insurance premiums of c.£13 in Scotland and c.£25 in N.I. Actual premium movements may be lower as insurers may already have priced in some of the change ahead of the announcement.

 Scotland – rate change key drivers

 Note that at the previous review in 2019, investment returns were quoted relative to RPI, with damages inflation assumed to be in line with RPI. Now, both the returns and damages inflation are set relative to CPI.

 Northern Ireland – rate change key drivers

 As for the Scotland rate, the main driver of change is the change in assumed investment returns. The previous -1.5% discount rate in Northern Ireland was set in March 2022, a time when prospective investment returns were particularly low and much lower than those at the time that the -0.75% rate in Scotland was set (September 2019). This is why the increase in assumed investment returns is significantly greater than for the Scotland rate.

 The movements in the other assumptions are all identical to that of the discount rate in Scotland.

 • The Ogden rate is set by the Lord Chancellor based on advice from an Expert Panel, which includes the Government Actuary. The rates in Scotland and N.I. are set directly by the Government Actuary.

 • Some parameters (eg the tax and expenses adjustment), are prescribed when setting the Scotland and N.I. rates but are within the remit of the Expert Panel in England and Wales.

 • The investment portfolio assumed in the Scotland and N.I. reviews is slightly lower risk than was assumed in the England and Wales review in 2019. All else being equal, this might suggest a slightly higher discount rate in England and Wales.

 Given the key differences between the processes for setting the rates, there remains uncertainty in the next Ogden rate. Our view remains that the likely range for the next Ogden rate will be a single rate of +0.5% to +1.0%. This is unchanged from our view prior to the Scotland and N.I. announcements.

 It would be a surprise if the Ogden rate was set lower than the Scotland and N.I. rates. The Lord Chancellor will undoubtedly have these rates in mind when setting the Ogden rate, and historically the Ogden rate has been slightly higher (or less negative). It would also be a surprise to see a dual rate. Although a dual discount rate has several advantages, including fairer and more accurate levels of compensation, the fundamental disadvantage is the significantly increased complexity and associated costs involved for all parties. Our sense from market conversations is that stakeholders feel the disadvantages currently outweigh the benefits.

 Next steps and preparing for the new Ogden rate