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The Ogden Discount Rate change explained
The Government’s recent announcement that the Ogden discount rate is to be slashed from +2.5% to -0.75% has sent headlines – and insurers – into a frenzy. But what does it actually mean?
What is it?
In short, the Ogden discount rate is a calculation used to determine how much money insurance companies should pay out to people who have suffered life-changing injuries, in order to cover all their predicted future losses.
The settlement amount agreed needs to accurately reflect the claimant’s future loss of earnings, as well as covering any care costs.
However, because it is paid in a lump sum which will be invested when it is received, the amount is adjusted to account for the interest they would expect to earn. That’s where the discount rate comes in.
How does it work?
To work out how much would be needed over the claimant’s likely lifetime, a multiplier is applied to the claimant’s financial needs – i.e. the earnings they will miss out on, the cost of care needed. This multiplier takes into account age, gender, and mortality risks in order to guess this.
To work out how much to deduct to account for interest on the sum provided, the insurer uses the discount rate.
The Odgen Tables list the multipliers which apply at each various discount rate, across a range of -2% to +3%.
The lower the discount rate, the higher the typical settlement of a claim.
What does the cut mean?
The Lord Chancellor has slashed the rate to -0.75% from the +2.5%, where it has consistently been since 2001, taking effect from 20th March 2017.
The new rate means the payout due to a claimant will be much higher than the same settlement would have been at the old rate.
This significant change is expected to cost the insurance industry millions of pounds.
What will the impact be on my insurance?
Insurance premiums are likely to rise, particularly personal and commercial motor insurance premiums, as insurers try to make back the extra money they will now have to pay out.
Huw Evans, Director General of the Association of British Insurers (ABI), called the rate change “a crazy decision”.
“Claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK. We estimate 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,” he said.
As we near the end of the financial year, some insurers are already seeing the change’s impact on their profits, with some even delaying announcing their profits altogether as they calculate what the impact will be.
Insurer Admiral announced it will be raising car insurance premiums by an average of 10%. Aviva UK’s combined operating ratio has surged to 106.3%, whilst Direct Line has revealed a £175million drop in full-year profits as a result of the change.
If you are worried about how this may impact you, contact The Insurance Centre today and one of our advisers will be happy to talk through any worries you may have.