Changes to the way lump sum payments are calculated means personal injury claimants will now receive much larger amounts, which we expect will be a major factor in causing insurance premiums to rise. Here, we explain the recent change to the Ogden “Discount” Rate and how it may affect you.
The Ogden “Discount” Rate refers to a calculation applied to lump sum payments made to victims of personal injury or fatal accident caused by medical negligence, car crashes and other incidents. When a claimant is awarded compensation, the amount they receive is adjusted according to the amount of interest they can expect to accrue if investing it.
In February, the Lord Chancellor, Liz Truss, announced the rate would be cut from 2.5% to -0.75%, (an actual increase of 3.25%) a move that shocked many in the insurance industry.
Russell Corbould-Warren, Head of Technical Underwriting at Zurich Municipal commented: “… a drop to -0.75% was significantly further than we had anticipated. Even a small difference in the discount rate will make a significant difference for claimants, customers and insurers.”
The new rate applies to all claims settled after 20 March 2017 and is already starting to have an impact. The reserve for a recent private motor personal injury claim of £9m had to be increased to £22m following the Ogden rate change, and the award made to a seven-year old boy who suffered a catastrophic injury to his spine rose from £10m to £22.7m.
As a result of the rate change, insurers are revisiting rating structures and applying increases, with larger rises applying to more susceptible risks. It is estimated comprehensive car insurance premiums will rise by £50 – £75, with young drivers facing possible increases of up to £1,000 and drivers over 65 facing rises of up to £300.
AXA estimate the overall additional cost to insurers for current claims will be £7bn, and thereafter £1.2bn annually. RSA say motor rates will rise by 10% overall, and liability rates by 6 – 7%, which will affect small businesses.
With higher premiums also compounded by the doubling of Insurance Premium Tax to 12% in the last 18 months, it means businesses are currently facing a ‘perfect storm’ of price increases.
As your broker, we can advise on how Ogden may affect your business. We have access to a number of products and markets that will give a choice of cover to suit your needs. Importantly the sooner you talk to us the more time we will have to tailor a proposal to cover all your risk needs.
In particular we suggest you review and adopt the most robust risk management culture possible. This may involve maintaining appropriate records and a procedure, recording meetings and decisions, ensuring personal protection equipment (PPE) is used where necessary and that access to premises is appropriately managed and controlled. Such a good risk management approach will protect and minimise the probability of a serious claim occurring, thus ensuring the best possible terms can be negotiated with underwriters.
Because of Ogden, premium increases for many seem unavoidable, but we will always work on your behalf to secure the optimum value in terms of coverage, quality of service and price.
– Willis Towers Watson Networks Ogden Webinar slides
– AXA’s response to Discount Rate Changes
– Opinion: Tim Holliday on the effects of the Ogden rate change
– Ogden hits Aviva UK COR by Sian Barton
– ‘NHS face £1bn annual bill’ article
– BIBA ‘Damages Discount Rate Consultation’ letter newsandviews.zurich.co.uk