Civil Liability (Information Requirements) and Risk Transformation (Amendment) Regulations 2020

Baroness Kramer Excerpts

Monday 16th March 2020 Grand Committee

The insurance industry began by saying: “We are highly solvent, and highly able to pay claims”. Then, gradually, the message slightly shifted and became: “Are you sure that you insured yourself sufficiently and properly?” That carries some very difficult messages and implications for small businesses, which face these unprecedented conditions. I accept that my noble friend will not be briefed on this issue but, with our nation facing these difficulties, it is sufficiently important for him to be aware of and know something about it.

[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.

--- Later in debate ---

[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.