Discount rate mitigation: the Brexit backdrop
There is much speculation about the turbulence that might follow Brexit, whether on a deal or no-deal basis. The UK Government has been scaling up its preparations, including the recent publication of ‘Operation Yellowhammer' which is a Cabinet Office contingency plan.
At the same time, compensators were left disappointed by the Lord Chancellor's decision to increase the personal injury discount rate from -0.75% to only -0.25%. The supporting analysis by the Government Actuary's Department expressed referenced that the rate might have been set 0.5% higher in the expectation of improving economic conditions during the next 5-year review cycle, but for short-term uncertainty including Brexit.
Against that background, we explore the extent to which the political and economic consequences of Brexit could potentially help compensators by reducing awards under any of the traditional heads of loss in personal injury claims.
Argument: Economic turbulence could reduce job opportunity and/or security. There are already high-profile examples of some sectors, such as banking, where companies are relocating jobs outside the UK.
For EU citizens, post-Brexit restrictions on working visas could make a career-long UK loss of earnings model unrealistic.
Argument: Potential for abolishment or watering-down of the current worker's rights arising via EU directives. For example, a UK alternative to the Working Time Directive could remove the weekly maximum hours and hence the size of a care team that has to be retained on a rota basis.
Argument: Lower claims in the event of housing market deflation.
Argument: The 'but for' holiday model could become cheaper 'staycations' or UK locations, if a weak pound makes traditional EU destinations such as Spain not easily affordable for average earners.
Argument: Claimants could seek to challenge the security of non-UK compensators to provide PPOs. Fortunately however, a recent case rejected any fatal Brexit repercussions for PPOs as a form of award and approved settlement on that basis.
As well as opportunities for compensators to seek downwards negotiation of traditional heads, there will inevitably be reciprocal opportunities for claimants to argue that Brexit could have inflationary effects in other areas. Some claimants may even seek to maximise claims generally in order to hedge against Brexit uncertainty.
Additionally, compensators may face higher costs claims during the transitional period, as opponents spend time exploring the various Brexit repercussions.
Whatever the eventual financial balance of the opposing arguments, the uncertainty of itself creates many opportunities for commercial solutions. The personal injury market had to show similar ingenuity in the lead-up to the announcement of the new discount rate. Brexit could have the same effect. Consequently, a bespoke strategy will be required, particularly for the claims involving non-UK citizens.
Some of the effects will not be apparent for a while, as the UK reasserts its sovereignty and starts overhauling the former EU regulation. Compensators will therefore need to closely track developments in order to interpret the potential implications for personal injury quantum and reserves.