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The Ogden Discount Rate Has Been Increased

When the Ogden rate was initially reduced from 2.5% to -0.75% in March 2017 we wrote to our clients setting out the detail of what had changed and the potential implications. We received very positive feedback on this and given the latest announcement on Monday 15 July we thought it may be useful to explain the new position and what this may mean for you.

Read our previous article on the Ogden Rate


Latest announcement

It was announced on Monday 15 July that the Ogden discount rate will marginally increase from -0.75% to -0.25% with effect from 5 August 2019.

This was a disappointing result for the insurance industry, which had anticipated a positive rate. This is because the government had indicated to the industry and financial markets that the rate would be set between 0% and 1%. Consequently insurers have based their future anticipated claims costs on this which has helped to keep premiums down for customers.

The impact is not just directly to the insurance industry, with the biggest single financial impact being felt by the NHS, which therefore impacts UK PLC and tax paying individuals in England and Wales. 


Impact of the change for the insurance industry

As the new rate is lower than anticipated, it's likely insurers will have to increase the money they set aside to pay future claims which in turn increases the pressure on premiums. This is an unwelcome outcome for customers as well as insurers.

A new Scottish discount rate is currently being reviewed with a report expected in late September for an implementation soon after. Initial indications suggest that the approach in Scotland would lead to a rate that is more favourable to claimants than in England and Wales.



Illustration of calculation

The table below illustrates how compensation payments would be calculated at the current rate of -0.25% and also at lower and higher rates for a 36 male paraplegic unable to return to work.
 


-0.75%

-0.25%

0%

1%

+2.5%

 Pain, Suffering & Loss of Amenity

£200,000

£200,000

£200,000

£200,000

£200,000

 Loss of Earnings

£1,282,400

£1,180,000

£1,132,800

£969,600

£782,000

 Care Package

£12,050,000

£10,468,000

£9,786,000

£7,614,000

£5,506,000

 Rehabilitation

£301,250

£261,700

£244,650

£190,350

£137,650

 Aids & Appliances

£903,750

£785,100

£733,950

£571,050

£412,950

 Legal Costs

£400,000

£400,000

£400,000

£400,000

£400,000

 Total compensation

£14,987,400

£13,144,800

£12,347,500

£9,795,000

£7,288,600


 




During the past two year period when the rate was set at -0.75%, uncertainty regarding both the timing of a further discount rate change plus the rate to be determined, have created opportunities to negotiate claims at rates other than -0.75%. The new rate of -0.25% removes this uncertainty, meaning it will not be possible to negotiate claims at rates other than -0.25%.

Whilst most insurers believe providing seriously injured people with a fair level of compensation is the right thing to do they also believe the insurance industry is currently overcompensating. While the recent announcement has signified a move in the right direction, they feel unfortunately the new rate of -0.25% does not go far enough and an opportunity has been missed to further tackle the increased cost of settling personal injury claims, which ultimately contributes to rising customer premiums.

It will be necessary for us to deal with the changes that this announcement will drive. As you would expect you can be assured that our teams will work closely with you to manage this impact to ensure that we support you in delivering a sustainable proposition which delivers value.




Independent Commercial Broking Ltd. Registered in England & Wales. Reg. No. 4024377 Reg. Offices: Virginia House, 35-51 Station Road, Egham, Surrey,TW20 9LB. Authorised and regulated by the Financial Conduct Authority.