Civil Liability (Information Requirements) and Risk Transformation (Amendment) Regulations 2020
Lord Parkinson of Whitley Bay
That the Grand Committee do consider the Civil Liability (Information Requirements) and Risk Transformation (Amendment) Regulations 2020
Relevant document: 6th Report from the Secondary Legislation Scrutiny Committee
Lord Parkinson of Whitley Bay (Con)
My Lords, the regulations before the Committee serve two important functions. First, they set out information reporting requirements for motor insurers, which will allow Her Majesty’s Treasury to evaluate the benefits to consumers from the reforms set out in the Civil Liability Act 2018. Secondly, they make a technical fix to the Risk Transformation Regulations 2017 to clarify an ambiguity concerning the nature of qualified investors in transactions in insurance-linked securities.
I begin by outlining the information reporting requirements under the Civil Liability Act, which constitute Part 2 of the instrument. The Civil Liability Act 2018 established a new compensation and claims system for whiplash injuries and introduced a new process for calculating the personal injury discount rate. These changes were expected to result in savings for insurers and lead to lower motor insurance premiums for consumers.
Indeed, when the Act was introduced, the Association of British Insurers published a letter from its members, comprising 86% of the ABI’s motor and liability insurance businesses, in which it publicly committed to passing any savings from the reforms on to consumers. During the passage of the Civil Liability Act, noble Lords tabled an amendment intended to hold insurers to account for this commitment. This instrument flows from that. It obliges insurers to provide data that will allow the Treasury to report back to Parliament on whether motor insurers have passed on any cost benefits arising from the Act.
Insurers that issue 100,000 or more private motor insurance policies annually—these make up over 95% of the UK market—will be required to provide a one-off data submission to the Financial Conduct Authority showing their costs and premiums for the three years from April 2020. They will also be required to calculate counterfactual figures, demonstrating what their costs and premiums would have been had the Act not been implemented. The data must be accompanied by a statement from a qualified auditor verifying that it meets the standards set out in the regulations. Insurers may also provide relevant supplementary information to explain any figures provided. The Financial Conduct Authority will review and aggregate the data before passing it on to the Treasury. A report assessing the extent of any savings and whether these were passed on to consumers will be laid before Parliament after 1 April 2024.
The reporting requirements themselves have been designed to allow the Treasury to make a reasoned assessment of the Civil Liability Act’s impact on motor insurance premiums, while not imposing a disproportionate regulatory burden on insurers. As such, they have been developed in close consultation with the Financial Conduct Authority and industry representatives.
I draw your Lordships’ attention to the fact that the Secondary Legislation Scrutiny Committee described this instrument as an “instrument of interest” in its report of 26 February. I see that my noble friend Lord Hodgson of Astley Abbotts is in his place. The report notes that the date by which the Treasury must submit its final report before Parliament will be up to seven years from when the Civil Liability Act received Royal Assent, and that a tighter reporting timescale would have been preferable. I must beg to differ on that.
First, it is important to note that the Act’s reforms were not put into effect immediately upon Royal Assent. Indeed, they will be fully implemented only later this year, with the whiplash reforms set to come into force in August. Secondly, the Government believe that the three-year reporting period and subsequent time for data processing are proportionate, allow for a thorough assessment of changes to costs and premiums over time, and avoid placing unnecessary burden on the industry and the regulator. The reporting requirements themselves have been designed to provide the Treasury with sufficiently robust data to make an accurate evaluation of the impact of the Civil Liability Act on motor insurance premiums while minimising the regulatory burden placed on insurers.
Part 3 of the instrument amends the UK’s regulatory framework for insurance-linked securities. The Risk Transformation Regulations 2017 set in law a tax and regulatory regime designed to enable the UK to become an attractive jurisdiction in which to domicile insurance-linked securities special purpose vehicles. Insurance-linked securities allow insurers to transfer risk to capital markets with their value being linked to an insured loss event.
Lord Hodgson of Astley Abbotts (Con)
My Lords, I congratulate my noble friend on his clear exposition on quite a technical matter. I think that this is the first time I have participated in a debate where he is on the Front Bench—in the pound seat, so to speak—and we look forward to hearing his summary after we have raised our questions.
As I did earlier, I declare an interest as the chairman of the SLSC, whose report is included in the papers my noble friend referred to, but I am now speaking in my own capacity, not as the chairman or indeed for any member of that committee. I am speaking because I took a considerable interest in the proceedings on the Civil Liability Bill as it then was, now the Civil Liability Act. On several occasions, the noble Baroness, Lady Kramer, and I, along with many others, laboured long into the night to get what I thought was a pretty good cross-party consensus as to the right way forward.
I was glad to do that because I was very supportive of the policy behind the Act; it sought to bring fairness to a very complex area that is also highly emotionally charged. When people suffer life-changing injuries, they and their families are inevitably extremely upset, as anyone would be because one’s life has been completely wrecked. It is important to keep their position in mind, but we also had to remember that not all our fellow citizens are saints and there are people who might be inclined to push the envelope rather, so we had to make sure that their position was balanced.
There are essentially three interested parties in these cases: on the one hand is the injured party—or at least the allegedly injured person—while on the other are the other insured persons in the class covered. That is because this is not a risk-free, cost-free change. If insurance companies pay out on policies on which proper damages should not be paid, the costs fall in part on the other people in the insured class. For those Members of your Lordships’ House who are of a greater age than my noble friend on the Front Bench, it is of course insured drivers aged over 60 who pay a particularly heavy premium on these things. Finally, there are the insurance companies, which have to satisfy their shareholders of a reasonable degree of profitability. As was hinted at in my noble friend’s exposition, they are the least popular of the three parties.
I have two specific areas of concern about this to record with my noble friend. First is the way the discount rate applicable to sums awarded for personal injuries is calculated and set forward. This is a technical matter. If you are awarded a lump sum to look after your terrible injuries, it is not dead money; it will earn a return. The difficult issue is therefore to decide what rate should be applied to the sum to make sure it is fair to all parties. The Ogden rate, as it is called, is set by the Lord Chancellor, now the Secretary of State for Justice.
Consequential changes from changes in the rate are huge, and politicians are therefore understandably fearful. From 2001 to 2015, the Ogden rate was unchanged at 2.5%. In 2001 it was perfectly fair, but by 2015 it was patently unfair. The level of interest rates meant that you were quite unable to earn the return of 2.5% on the lump sum awarded to you. That was terribly unfair and wrong to people looking to it to look after their injuries incurred at work, on the road or wherever. In that latter year, the then Secretary of State for Justice suddenly, with a jerk on the tiller, moved the discount rate from 2.5% to minus 0.75%. That meant that the NHS had to find another £9 billion to compensate for the injuries expected actuarially out of its doing business; £9 billion was suddenly hoovered up and had to be put aside.
Such swings are clearly very unhelpful and the whole area needs more frequent reviews. It was not a matter of cross-party dispute; we all agreed that it needed a proper procedure. It needed a proper procedure also to provide the Ministers having to take this difficult decision—the Secretary of State for Justice, the Lord Chancellor—with some air cover. We needed a procedure so that every so often we had to go through the whole routine and ramifications of it and come up with an answer. That would then provide the Secretary of State for Justice, the Lord Chancellor, with a rationale for making a decision, instead of having to do it out of the blue on their own.
As a result of the final shape of the Act, the procedure was put in place and went to work. The Ministry of Justice guided the market as it would be, between 0% and 1% when the first review took place—but it never happened. It went to the Treasury, and when it came back another 1% had been taken off it, so all the work we had done—the way we had achieved cross-party consensus, not only in this building politically but externally with industry and all the interested parties—was set at naught. That seems a terrible waste and a terrible mistake, because once politicians of any party have to get involved in this, the numbers are so great that they are terrified and will not make a change, and we get into the position in which we found ourselves in the past.
If not this afternoon, perhaps my noble friend could illuminate people at the Committee today, such as my noble friend Lady Kramer—I think I can call her “my noble friend” on this matter—on some of the ways the Government reached the sudden decision not to accept the number recommended by the Committee. That is the first question.
The second question relates to the Civil Liability Act and the soft-tissue whiplash injuries. As my noble friend will be aware, this is not a medical condition that lends itself to easy diagnosis. People with malice aforethought can therefore ride the system. I discovered that at Runcorn railway station. I chair a company at Runcorn. I arrived there and took a taxi—a 10-minute ride—to the place where the company meets. The driver and I talked about whiplash. He said, “Oh, yes, it’s called cash for crash.” I said, “How does it work?” He said, “It’s quite simple. Four or five people—maybe half a dozen—buy a banger for 150 quid and they arrange to crash it into a taxi.” I asked, “Why do they crash into a taxi?” He replied, “Oh, because they know it will be insured, otherwise the local authority would not give them a licence. They also know that if we make too much of a fuss and complain, we may not get our licence renewed by the local authority, because we are seen not to be helpful to people who have been injured.” This is the other side of a situation where some people have terrible injuries: there are people who have been gaming the system in a terrible way.
It was clear that if the proposals under the Act were brought into effect there would be substantial savings. The question was where those savings would fall. As my noble friend Lord Parkinson pointed out, appropriately, there was a concern that too much would end up with the shareholders of insurance companies. My committee made the point about the time, and my noble friend has rebutted that by saying, “Of course, we haven’t been able to begin collecting the data till August 2020.” The Act took effect on 1 January 2019, so we will have had a year and a half. It is important from the point of view of how insurance companies present themselves that they should be able to show that they are clean-handed. By March 2025, when the report comes out, we will be eight years on from when this was a big issue. It is only fair that where people have done their stuff in the industry, they should be able to say so and show it in slightly less than seven years.
Perhaps I may raise one last technical question about the way in which these savings are going to be shown. It is about periodical payment orders. One does not have to be awarded all the money in a lump sum. One can be awarded it on a PPO, as it is called, where one gets an amount of money every month, every quarter or every year depending on one’s circumstances. I have always felt that to be a sensible way to proceed. If you have a terrible crash at 25, the doctor will examine you and say, “I think you’re probably going to die when you’re 45”. Therefore, the sum awarded to you by the court is for 20 years. You may be unlucky and die at 45, but you may be lucky and live on. That means that if you live to 50 or 55, the end of your life will be lived in much reduced financial circumstances because your award will have run out.
PPOs are an important way forward, but they are not liked by insurance companies because they cannot put a pink ribbon around the file and say, “We have paid out our £1 million, £2 million”—or whatever the number is—“and it is done.” They are left with this tail of having to pay out so much every week, month, quarter or whatever and will therefore have to allow for that, and account for it, in how they set up their financial statements. There is therefore a bit of a temptation to push people towards a nice lump sum. The awful reality is that, if you say, “Here’s 5 million quid, or here is what seems a smaller sum on a monthly basis”, people will say, “Oh, I’ll take the big number because it looks good”. When we look at the way in which the calculations are done, to show how insurance companies have made the savings—and shared them—I hope that there will be no implicit bias in how they are drawn up to make it less likely that people can get periodical payment orders.
Before I close, could I go completely off-piste? We know about insurance companies being unpopular, so I want to ask my noble friend a Covid-19 question. I quite understand he probably will not be able to reply, but it would be helpful if I could put it on the record now. He might then be able to reply to me and the other members of the Committee shortly.
Baroness Kramer (LD)
My Lords, it is a delight to follow the noble Lord, Lord Hodgson of Astley Abbotts, because I could probably just say, “I agree with Lord Hodgson”, and sit down. I want to welcome the noble Lord, Lord Parkinson, to his new role, as this is my first opportunity to do so. He is getting to meet the geeks; he has several of them here in the Room today. I am afraid we are going to be part of his future.
I know that the last point the noble Lord, Lord Hodgson, made on coronavirus does not apply to this SI, but it underscores the significance of looking at the resilience of our insurance industry. Thanks to our success in being a hub for international insurance, an awful lot of liabilities are carried in the UK as a consequence of business done well outside the UK. The resilience of this sector will be absolutely critical to overall financial stability. I wish the Minister well in trying to work his way through what will be a very sensitive and difficult process. As the noble Lord, Lord Hodgson, has reminded us, it will impact not just at the macro scale; it will come down to sectors, businesses and small and large employers, which will be impacted.
In the many hours—all late at night, for reasons I can never quite remember—when we put together the Civil Liability Act, much of my focus was on trying to determine a way to deliver a personal injury discount rate that made some sort of sense. On the rate in play prior to the Act, I think someone had probably decided in 2001 what a sensible number to use was, and then looked around for a reference rate that would provide it. It was related to the yield in gilts at that point, as I remember.
Lord Hodgson of Astley Abbotts
It was the Wells v Wells case, in which the noble and learned Lord, Lord Hope of Craighead, was involved—the noble Baroness may recall that he interrupted us several times on it. That is how it was set; it was linked to the index-linked gilt rate.
Baroness Kramer
Of course, as the years went by it became evident that it no longer made sense. If I remember right—if I am wrong, the noble Lord, Lord Hodgson, will correct me—the way in which the lump sum is calculated is that award is made on an estimate of the length of time the individual will live, and the degree of injury and cost that will be consequent over that time. Therefore, the discount rate is the mechanism for bringing it back to a number which creates the lump sum. Even a very minor variation in that number creates a very different lump sum.
As we and the Treasury hunted around, it became impossible to find a reference rate that would work for all purposes: hence the move to say that the Lord Chancellor should make that decision, but with the advice of an expert panel. The expert panel was seen as an important part of it because there were so many changing and subjective elements that, in a constantly changing set of economies, would undoubtedly have play. All we were certain of was that 2.5%, the old rate, was not right and that minus 0.75%, which as I remember was the result of the Treasury finally going back and looking at its reference rate using the same methodology as in 2001, was obviously complete nonsense. It assumed that if you had a lump sum and were going to invest it, you would, first, do so on a risk-free basis and, secondly, look at such a narrow range of instruments into which to invest it that you would get only negative yield. None of us could think that even the most incompetent financial adviser would suggest investing money in that way, when there were plenty of secure ways. Even putting it into a bank savings account with a guarantee on it would have yielded far more, so it was clearly all wrong.
What has distressed all of us—I join the noble Lord, Lord Hodgson, in this—is that the advice of that expert panel was not taken. It was overridden, and instead of a number somewhere between 0% and 1%, which gave a lot of discretion to the Lord Chancellor, we ended up with minus 0.25%. That was not as bad as the minus 0.75%, which is obviously devastating as a discount rate, giving you a huge lump sum as a consequence. But it was still a number that most people felt could be justified only by someone looking at an ultra-conservative, unrealistically constrained investment strategy of that lump sum which would have to, as it were, deliver over the remaining life of the individual who had been injured.
We were all very concerned not to disadvantage someone who was being given a proper award for injuries they had sustained. That was never the purpose. Nor was it the purpose to be unfair in the way we treated insurance companies—less because we all love insurance companies and very much more because we know the cost is passed on. We heard a great deal from those who spoke up for young drivers, who often carry the highest premiums and, as a consequence of the original assessment of minus 0.75%, were going to see huge increases to their annual premiums, perhaps as high as £75 a year added on to the premium. We all knew that was completely inappropriate.
I ask the Minister as part of this—even though it is not within the language of the statutory instrument itself—to go back and try to understand why the recommendations of the expert panel were set aside. It seems we have never heard a sufficient explanation as to why it happened. If the expert panel is not going to be the answer, it seems we have to go back and look at some other system that everybody can rely on and have faith in.
As for the SI itself, I join the noble Lord, Lord Hodgson, in thinking, “Come on, guys—2025?” We are all slightly cynical and would like assurance a lot earlier that the revenue accrued, as a consequence of the change, is being passed through to the customer. That was an assurance given to us by the industry. I know that many of us who spoke up in favour of finding a new way to provide a personal injury discount rate did so only because we had that absolute assurance from the industry: that the money would be a pass-through and not a further distribution to shareholders.
I have no problem with the more technical aspects of this SI. It is just a good lesson that statutory instruments drafted in haste nearly always need to be changed sometime within the following 18 months. This is an introduction to that for this Minister. I am sure we will meet again around the table, changing statutory instruments—I seem to spend a large part of my life doing that. I thank again the noble Lord, Lord Hodgson, who covered all the issues. I support anything he said.
Lord Tunnicliffe (Lab)
My Lords, I take it from conversation that this is the Minister’s first appearance; I congratulate him on that. As he can now appreciate, Treasury SIs are somewhat intimate affairs. I thank the noble Lord, Lord Hodgson, and the noble Baroness, Lady Kramer, for their interesting speeches. Having done most bits of Treasury legislation over the last 10 years, I managed—uniquely—to dodge the bullet on this one and therefore was not part of these late-night parties, so my comments will be rather narrower.
We support this measure. Indeed, Part 2 deals with some of the concerns raised during the passage of the 2018 Act. I am generally not one for being overtly political, but I say to Ministers that exercises such as this should influence the Government’s approach to primary legislation. There may now be a large majority in the Commons. However, members of the Opposition and outside organisations will continue to offer sensible suggestions as legislation goes through Parliament. Rather than resisting amendments and having to introduce changes later on, Ministers would be better advised to engage on key issues and ultimately pass better legislation.
Following the passage of the 2018 Act, this instrument seeks to ensure that insurers pass on to consumers any savings generated from the changing calculation of the personal discount rate. This is achieved by requiring insurance firms to provide figures on their premiums, as well as the total value of claims, to the FCA.
In the Commons, the honourable member for Oxford East, Anneliese Dodds, asked the Minister what would happen to firms if they chose not to comply with the directive. That was an eventuality she deemed realistic, given that the Government have decided to legislate rather than pursue this informally. In his response, the Economic Secretary to the Treasury asserted that both the FCA and the Competition and Markets Authority already have the relevant powers in this scenario. I hope the Minister can confirm where such powers reside, so consumer groups can be reassured.
Lord Parkinson of Whitley Bay
I am grateful to noble Lords for their words of welcome. It is a privilege to be intimate among the geeks, as the noble Baroness, Lady Kramer, said. This debate has illustrated the rigorous approach that your Lordships’ House brings to legislation, including where it can be improved post facto. It was also helpful that in all their speeches, noble Lords referred to striking the important balance between providing help to people who have suffered an unpleasant accident and fairness to those who must bear the cost, which is what this boils down to fundamentally.
My noble friend Lord Hodgson and the noble Baroness, Lady Kramer, asked about the discount rate and how it is calculated. The current rate is, as was touched on, minus 0.25% as of August 2019, using calculations set out in the Civil Liability Act. That was set by the Lord Chancellor at the time, David Gauke, who had the benefit of expert advice and reached his decision on the rate, having taken this analysis and the requirements of the Act into account. He was assured that this was the fairest outcome for the claimants. That included expert advice from the Government Actuary’s Department. Moving forward, an expert panel will be convened to review the rate. As the noble Baroness, Lady Kramer, said, panels such as that can form an important part of the process as we move forward.
Baroness Kramer
It might help the Minister to know that 0% to 1% was the recommendation of the Government Actuary’s Department.
Lord Parkinson of Whitley Bay
I am grateful. Not having had the benefit of being here during the passage of the 2018 Act, I am not as au fait with it as other noble Lords.
My noble friend Lord Hodgson and the noble Lord, Lord Tunnicliffe, both touched on the gap between the Act receiving Royal Assent and the Treasury reporting back. There are some good reasons which contribute to the time period. The Treasury believes that the reporting period of three financial years is an appropriate time period to make a thorough assessment of insurers’ costs and premiums, following reforms instigated by the 2018 Act, and to observe any trends which emerge over time. After the reporting period, firms will have six months to complete their actuarial and audit processes and to submit their data to the FCA. The FCA will then have six months to review and aggregate the data before passing it on to the Treasury to complete its evaluation.
We are confident that each stage of the reporting process has been allocated a fair and proportionate amount of time given the level of data processing and analysis required, but of course the report represents just one way in which the Treasury continues to ensure that the insurance market is working well for insurers and consumers alike. I can assure noble Lords that our objective of ensuring good consumer outcomes will be as relevant in 2025 as it was when the Act was passed.
My noble friend Lord Hodgson raised periodical payment orders, or PPOs. These are and will continue to be used in those cases where they are an appropriate remedy, but they are not suitable in all cases and the discount rate addresses this fact.
My noble friend also asked about coronavirus. I will certainly take away the points he has raised and discuss them in more detail, as he suggested would be useful. I can say to him and other noble Lords that the Government understand people’s concerns about insurance cover in respect of coronavirus and are in close daily dialogue with the insurance sector, which I hope covers firms such as that which he mentioned, as well as with the Financial Conduct Authority and the Prudential Regulation Authority. In these difficult times, we encourage insurance companies to do everything they can to support other businesses and ensure open conversations with their clients. Government will continue that dialogue. Of course, the potential implications of Covid-19 for the wider UK economy and the economic response were addressed by my right honourable friend the Chancellor in his Budget Statement. We stand ready with a series of measures to support the public health response and the economy. These include financial support for small businesses in difficulty, which may be of some consolation to my noble friend’s company.
The noble Lord, Lord Tunnicliffe, followed up an issue raised in the other place by his honourable friend: how we can make sure that insurers comply with the requirement and the penalties for non-compliance. The penalties are included in the Financial Services and Markets Act 2000. Section 11 of the Civil Liability Act makes the necessary changes to that Act, empowering the FCA to use its full suite of supervisory and enforcement powers to bring about compliance with the requirements of these regulations. I shall consult Hansard afterwards. If there are any other issues which I have missed, I shall certainly undertake to follow them up with the small but select group of noble Lords who are here.
The regulations will allow the Treasury and in turn Parliament to assess whether the cost benefits of the Civil Liability Act reforms have been passed on to motor insurance customers, and they will make a technical fix—which I am grateful to noble Lords for recognising —to the Risk Transformation Regulations 2017 to make it clear that insurance-linked securities can be offered to qualified investors. I therefore commend the regulations.