Civil Liability Bill [Lords]

Emma Little Pengelly Excerpts

2nd reading: House of Commons & Money resolution: House of Commons & Programme motion: House of Commons
Tuesday 4th September 2018 Commons Chamber

[Theresa Villiers (Chipping Barnet) (Con)]

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.

[Emma Little Pengelly (Belfast South) (DUP)]

Is the right hon. Lady surprised to learn that, due to the ongoing political situation in Northern Ireland, the tariff reduction still stands at 2.5%; that those in Northern Ireland who suffer significant injuries continue to get less compensation than when the adjustment was made, which will also be the case in GB under this Bill? Does she agree that that needs urgently to be addressed?

[Theresa Villiers]

I am grateful to the hon. Lady for raising that point. I was not aware of it, but it is another example of how the political stalemate in Northern Ireland means that changes that need to be made are not taking place. It will be important, ultimately, for this House to consider whether we need to legislate to ensure that civil servants in Northern Ireland can take more of these decisions. I know that everyone is reluctant to move to direct rule, but we may need to take intermediate steps to ensure that these practical matters are dealt with, alongside, obviously, the issues recently raised in the planning system.

A second important reason why I think it is important to proceed with the measures in clause 10 is, as the Secretary of State has pointed out, the impact of the current situation on the NHS. A system that over-compensates claimants in clinical negligence cases inevitably swallows up resources that would otherwise be spent on frontline care. Last year, the NHS spent £1.7 billion on clinical negligence cases, representing 1.5% of spending on frontline health services. The annual cost has almost doubled since 2010-11, with an average 13.5% increase every year. In 2017-18, an additional £400 million had to be provided to the NHS as a result of the change in the discount rate to -0.75% in March 2017. I understand that if the revised discount rate set under the new procedures is between 1% and 0%, that would save the NHS between £250 million and £550 million a year.

A further reason why the changes set out in clause 10 make sense is that they would bring us into line with prevailing international practice. According to the Association of British Insurers, our -0.75% rate is the lowest of similar common law jurisdictions. Apparently, no other jurisdiction has a single rate of less than 1%, and the majority set rates in excess of 2.5%. As things stand, we are an international outlier, and the proposed legislation would remedy that.

I am conscious of the dismay felt in March 2017 when the change to -0.75% was made, seemingly out of the blue, with a sudden impact on the insurance sector and, of course, ultimately on consumers buying insurance policies. I hope that the regular reviews provided for by the Bill will help prevent such a shock from occurring again. I also welcome the creation of an independent expert panel to be consulted on the factors to consider in setting the discount rate in the future, to bring a wider range of expertise and experience to the process. We need a more transparent and predictable approach to setting that important discount rate, and I welcome the steps made to that end in the Bill.

In closing, I emphasise that it is vital for the insurance sector to pass on to its customers a new reduction in costs that arises as a result of changes to the discount rate or, indeed, the rest of the Bill. I note that companies representing a significant share of the market have provided a written commitment to the Lord Chancellor to do that, but of course it will be very important for the Secretary of State to hold them to that promise, so that the benefit of this Bill and the changes I hope it will bring into effect can be felt as soon as possible by our constituents via reduced costs in their insurance premiums, helping with household bills and providing important benefits.