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

Lord Parkinson of Whitley Bay Excerpts

Monday 16th March 2020 Grand Committee

Moved by

[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.

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As I said before, we do not oppose this instrument, but I repeat that it is unfortunate the Government did not choose to take on board suggestions made by the Opposition and NGOs back in 2018.

[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.

Motion agreed.