The impact of the new discount rate on public liability casesJul 17th, 2017
On 23rd June 2017 The Guardian ran a headline “Cost of NHS negligence claims likely to double by 2023, says study”.The study was produced by the Medical Protection Society, which along with other medical defence organisations (MDOs), indemnifies medical professionals.The MPS study called for changes to limit the cost of claims in the wake of the Lord Chancellor’s decision to reduce the discount rate from 2.5% to minus 0.75%.
According to the Kings Fund, an independent health charity, in 2010 more than one-fifth of GPs were aged 55 or over, and 10,000 of them were expected to retire by 2015.MDOs therefore face a perfect storm of being buffeted by the dramatic alteration in the discount rate, with nowhere to seek shelter, and the prospect of fewer members paying into the pot.Their response is not surprising.
Crucially, MDOs are not insurers.Indemnity is provided on a discretionary basis and there is inadequate financial protection for claimants to permit them to settle claims on a periodical payments basis.It is this ability that insulates the NHS against changes in the discount rate to a significant degree.Particularly given that the members of MDOs are normally also contractors to the NHS, so their costs (including MDO fees) are ultimately borne by the NHS, perhaps it is time for the state to step in and guarantee periodical payments for claims against MDO members?
It would be wrong to assume that insurers will always insulate claimants against the shock of higher claims.A statutory minimum of £2 million for employers’ liability was introduced in 1971. However, it was customary for insurers to provide unlimited cover until 1995.Since then, most insurers have provided a standard indemnity limit of £10 million: the withdrawal of unlimited cover was triggered by adverse claims experience, in particular the Piper Alpha catastrophe in 1988.
Whilst £10 million might have looked prudent in 1995, it can now be woefully inadequate, especially to cover a lifetime of periodical payments.In other words, the behavior of the market faced with higher individual claims has been risk avoidance.That presents a significant challenge for claimants seeking to transfer risks to insurers, through an award of periodical payments.
There is, perhaps, something deeper that underlies the problems outlined here.The negative discount rate is itself a reflection of negative real interest rates, which could be interpreted as a sign of an economy in deep trouble.Additionally, we all face challenges from the disruptive effects of technology, the impact of an ageing population and underlying economic cycles (both the short and the very long).
If insurers can’t make money from their free float (their use of our premiums between receipt and payment of claims) there are bound to be issues with the capacity of insurers to accept risk.
A taxpayer funded healthcare system needs a growing economy with more people paying more taxes to cope with rising demands.
These are indeed challenging times.