Changes To The Ogden Rate
29 March 2017
As of March 20, a change came in to place in insurance premiums that may well have gone unnoticed by many. The Ogden Discount Rate, which is used in the mathematical formula to calculate the total compensation awarded to someone with a life-changing injury for loss of earnings and care, has been altered.
On February 27 this year, The Lord Chancellor, Elizabeth Truss, announced her decision to reduce the discount rate from 2.5% to -0.75%. This is the first time it has been changed since 2001. It is because of depressingly low interest rates that an adjustment has had to be made.
The move towards a negative rate came as something of a shock to the industry, which had predicted the rate to fall at somewhere between 1 and 1.5%. It had previously caused shares in the industry to drop by as much as 7%.
The Association of British Insurers had made a legal challenge in the hope of pushing the decision back. This – and any further opportunity to appeal – was denied.
The decision to move to a negative rate means that insurers will have to increase their pay-outs to a sum that is even higher than the prescribed award.
How does that work in practical terms? Here is an example, as described by a Regional Operations Manager for Fusion Insurance Services:
“At the existing rate of 2.5%, a thirty-year- old individual disabled in an accident and predicted to earn £20,000 a year until retirement at sixty-five, thereafter needing care determined at £100,000 a year, might receive a lump sum award of £3,414,350.
With the new discount rate, the same thirty-year- old individual is estimated to receive a lump sum award of £8,480,400.”
This will potentially cost many insurance companies substantially more than they could have ever anticipated. Any large payouts could mean that the rising cost of claims will be passed on to the consumer in the form of higher premiums.
The reduction could present a lose-lose situation. Several senior underwriters have predicted that the market will be looking to increase rates in the region of 10 to 20%.
Insurance firms will have to quickly establish a clear placement strategy with their clients, highlighting any potential perceived problems from their liability risks. Several industry analysts have lashed out at the decision to alter the rate, stating that it will cause nothing short of chaos for businesses.
The Association of British Insurers expects that up to 36 million individual and business motor insurance policies could be affected in order to over-compensate a few thousand claimants a year. There are also concerns that a high proportion of the increased payouts will fall into the hands of no-win, no-fee lawyers pursuing large corporate bodies or the NHS.
Whilst it may take a few months for any real impact to be made, the fact that the new rate is now in place is bound to cause uncertainty in the near future.
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Written By Stuart McKenna