How the Ogden Discount Rate change could impact on insurance premiums in the UK
You may not be familiar with the Ogden Discount Rate, but it could mean significant increases in your insurance premiums and challenge whether your current limits of liability are adequate going forwards.
Changes have been made to the way that personal injury claims are calculated, and this will mean increased premiums for millions of UK policyholders.
What is the Ogden Discount Rate?
Personal injury compensation is a complicated process because victims often need to be compensated over many years. Typically a lump sum has been paid out up front to cover expenses such as loss of income and care costs.
This lump sum has in the past been reduced to reflect the fact that interest on the lump sum could be earned by the claimant, supplementing their settlement. This discount rate is known as the Ogden Discount rate and is reviewed periodically by the Lord Chancellor.
What are the changes?
Despite several years of very low interest rates, the Ogden Discount Rate had remained the same since 2001, at a rate of 2.5%. However, in March this year, the decision was taken to cut the rate from 2.5% to a negative rate of – 0.75%. This change is now starting to feed through in the form of premium increases.
These figures may sound very small and perhaps a little abstract, so here’s an example:
A thirty-year-old claimant is disabled in an accident. He would have earned £20,000 a year until retirement at sixty-five and will need care in retirement at an annual cost of £100,000.
At the previous 2.5% rate, he might have received a lump sum award of £3,414,350. Using the new discount rate, that amount would increase to £8,480,400.
Even this simplified example shows how the impact on injury claims could be vast. As the figures demonstrate, because personal injury settlements are staged over many years, even a small discrepancy in annual figures can compound itself over the years to create a dramatic increase in the final settlement.
Unfortunately, when an insurer’s costs rise as significantly as this, it is never long before those costs have to be passed on to policyholders in the form of higher premiums.
Breaking News: Following a backlash from the insurance industry (and a subsequent consultation) the Lord Chancellor laid before Parliament at the beginning of September a new draft legislation changing the way the discount rate is set. It has yet to go through Government and be enacted, but if it is the new rate might fall between 0% and 1%. Still impacting the market but to less a degree. It will not operate retrospectively, so the hit to the insurance market in 2017 will still be felt.
How is it affecting the insurance market?
Insurers have now had time to factor the changes in to their premium calculations, and unfortunately the changes are feeding through in to significantly higher premiums in many instances, as policies fall due for renewal.
Fluctuations in premiums are a fundamental feature of the insurance market, however it has been notable that a number of established insurers have been in touch specifically to warn of the potential for premium increases across many types of policy.
What will it mean for you?
These changes will affect any insurance policy – be that personal or business – that provides an element of liability cover for personal injuries. For example, it will obviously have a very big effect on liability policies such as Public Liability, Employers’ Liability and Products Liability.
Motor Insurance policies – whether they are for individuals or fleets – will be impacted too, as personal injury compensation to third parties is a significant part of the premium calculation. There is even an element of third party liability cover under your home or office insurance, so the implications really will be widespread.
What can you do to limit the impact?
The first thing you will need to do is simply to brace yourself for higher premiums and budget accordingly. We will be working with our clients in advance of renewal to explore the market to ensure we get the best possible deal.
Secondly, you need to consider buying an ‘excess of loss’ liability cover in addition to your main policy, as a catastrophic event could erode your current limit of liability. We will be speaking to our clients at renewal about this to help them make an informed decision.
Thirdly, now may be the time to take specific measures to reduce your risks in the hope of getting better premiums from insurers. For example if you have business insurance you may have been recommended to implement certain risk management procedures or train staff in Health & Safety. In the past you may have chosen to ignore any recommendations unless they were made mandatory by insurers, but now could the right time.
Similarly for personal insurances, there may be steps you can take to demonstrate that you are a responsible policyholder, such as installing a home security system, or opting for a telematic ‘black box’ for your car insurance. Telematics has so far been popular with young drivers to offset high premiums, but may now become more popular with more experienced drivers too.
These changes make it all the more important to take professional, impartial advice on your insurance. Contact us if we can help with any aspect of your personal or business insurances.