In my, I hope, relatively short remarks I would like to concentrate on clause 10 in part 2 of the Bill, which concerns the proposed changes to how we set the personal injury discount rate.
I would just say one thing on whiplash claims. I hope this latest attempt at reform is robust enough to withstand the ingenuity of the more predatory elements of the claims management industry, which, I am afraid, have done much to drive up the costs of insurance for many people.
Turning to clause 10, I would like to thank my constituent Robert Rams for his briefing on this issue, as well as the insurance company Ageas and others for their helpful insights into the matters we are debating.
The case for law reform in this area is strong. The need for change has been acknowledged by not just Ministers but the Justice Committee, the NHS and a number of others. Of course we all agree that people must be properly compensated where liability for personal injury is established. That is especially important for those with life-changing injuries that leave them unable to earn a living and in permanent need of care and support.
However, the discount rate system was supposed to ensure that those who are awarded a lump sum do not end up being over-compensated because of the investment return they will receive on the capital they have been awarded. Unfortunately, it seems clear that the current discount rate is no longer delivering that outcome and that there is now over-compensation. The 100% principle, which has been raised in the debate, is not being adhered to at the moment—it is 100%-plus.
The overarching purpose of this reform must be to provide a way to set the rules that is fairer for both parties. I therefore welcome the proposal to modernise the calculation of the discount rate to ensure it reflects the reality of how claimants actually invest the money they have been awarded. The assumption underlying the existing rate of -0.75% is that claimants are likely to invest solely in index-linked Government securities, which have a minimal return. That leads to a rate that is artificially low, and damages awarded are therefore disproportionately high. Sensible, professional advice
would instead see a lump sum invested in a low-risk portfolio of gilts and equities, which is what evidence suggests claimants are doing. That gives a significantly better return than index-linked gilts, so the -0.75% rate does not reflect reality.
The Bill will amend the assumption about future investment so that it is brought into line with what is more likely to be actually happening in practice. I think that is a fairer outcome, which is why I support clause 10. I have two main reasons for doing so, the first of which is that the cost of over-compensating claimants has to be met by insurance customers, thereby driving up the cost of premiums. I have already had the chance to set out my concerns on the real impact that has on young people, particularly those living in rural or suburban areas, where often public transport is not a viable means to get to work. The Financial Conduct Authority estimated that the switch from 2.5% to -0.75% was likely to cost insurers about £2 billion a year, inevitably feeding back into bigger bills for consumers.