What is the discount rate?
The personal injury discount rate, often referred to as the Ogden Rate, is a mechanism used in UK court cases to calculate the amount of compensation to award. This is usually a lump sum to provide for care costs following serious personal injury.
Why is it so important?
The objective is to make sure a severely injured person has the necessary financial security to provide for their care and loss of earnings. The Ogden Rate is used to calculate the amount of compensation they receive to reflect the return they will earn when that money is invested, often over a period of many years. In practice, this means the lower the Ogden Rate, the higher the lump sum settlement that insurers must pay out.
What changes has the government made?
Representatives of claimants have long argued that the Ogden Rate was out of date since the lump sum payments it is supposed to provide were based on the value of government index-linked bonds. Given the relatively low value of such bonds in recent years, claimants were in effect being under-compensated.
Following a detailed review, the Lord Chancellor announced that the Ogden Rate would be reduced from 2.5 per cent to -0.75 per cent, with the change taking effect from March 20 this year.
The adjustment made by the Ministry of Justice means that those suffering from serious injuries will receive significantly higher compensation payments than before, so the cost to the insurance companies will also be higher.
Give us an example?
An individual aged 30, predicted to earn £20,000 a year until retirement at 65, is disabled in an accident. At the old rate of 2.5 per cent, needing care costs determined at £100,000 a year, they might receive a lump sum award of £3,414,350. With the new Ogden Rate, they are estimated to receive a lump sum award of £8,480,400.
How are insurers reacting to the change?
Insurers are scenario-testing a range of possibilities and consider the impact could double the cost of claim payments – a very significant increase where settlements are in terms of millions of pounds. The overall cost to the industry on all impacted claims outstanding on March 20 is predicted to be £7 billion, with further annual additional costs of around £1.2 billion.
What are the implication for businesses?
This is one of the most significant changes facing the insurance industry in some time. It is an unwelcome change for insurers, brokers and customers alike but one that cannot be ignored.
The substantial increase in compensation payments affects claims costs for all lines of business which see claims for bodily injury. As such, business with motor insurance, Employers liability and Public and Products Liability insurance will all be affected.
Given the immediate effect of this legislation, it is vital that every organisation
reviews the adequacy of its liability Insurances. In many cases, current Public/Products Liability and even Employers Liability limits of indemnity will not be high enough to protect them in the event of claim(s) similar to the examples above.
In order to secure the best premium rates, it will also be more important than ever for organisations to be able to demonstrate to insurance underwriters that they effectively manage those risks that could give rise to claims now impacted by Ogden, such as driving risks, those related to health and safety in the workplace and operations where members of the public could be injured.
At Towergate, we can review your current Liability Insurance covers and obtain quotations to provide various higher limits if indemnity depending on your requirements.
We also can provide you with access to our exclusive Towergate Risk Management portal (see www.towergateriskmanagement.com for info) which is an excellent repository and go-to reference point to help our clients effectively manage their Risks. The annual cost is just £90 inc VAT which includes access to e-learning training modules.
Towergate is a trading name of Towergate Underwriting Group Limited. Authorised and regulated by the Financial Conduct Authority.