Thursday, September 22, 2011

The Canadian Institute of Actuaries’ Recommendations to the Rules Committee on the Prescribed Discount Rate and Prejudgment Interest

On June 1, 2011 the Canadian Institute of Actuaries (CIA) submitted their observations and recommendations to the Civil Rules Committee with respect to the Committee’s review of rules 52.09 and 53.10 of the Rules of Civil Procedure (“the Rules”). The CIA reviewed these rules from the perspective of today’s economy − a low interest rate environment.

Rule 52.09(1) lays out how the discount rate is to be calculated for awards for future pecuniary damages in order to account for investment and price inflation rates. The CIA pointed out that the prescribed interest rate in Ontario for the first 15 years is lower than any other province or territory where discount rates are prescribed for this purpose. As a result, since interest rates are at historically low levels, a plaintiff will receive a higher settlement in Ontario than a plaintiff in another province or territory.

Rule 52.09(1) provides for a negative adjustment of 1%. This negative adjustment is a result of a belief in 2000 that rates of return for real return bonds were higher than the true underlying expected real rate of return. The CIA believes that this may not be a valid justification in today’s economic environment but noted that this negative adjustment could serve a valid public policy objective by providing a margin for adverse investment contingencies.

The CIA noted that there is a potential for misinterpretation of rule 53.09(1) and recommended that the wording be altered slightly to clarify that there is not only one discount rate to be applied to one particular loss under 53.09(1) and to make it clear that the rate prescribed by 53.09(1)(a) is to be used in discounting all losses.

Lastly with respect to rule 53.09(1), the CIA suggested that the Committee consider prescribing a nominal discount rate that could be used in situations when a real discount rate would be inappropriate.

Rule 53.10 sets the prejudgment interest rate for non-pecuniary damages at 5% per year. The CIA acknowledges that this rate is reasonable from a public policy perspective as it motivates settlement and compensates successful plaintiffs for delays in resolution. However, the CIA suggests that a floating rate based on yields on GICs with an adjustment may be a consideration. They recognize however that this would largely increase the complexity.

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