Insurance companies have reacted in alarm at the surprise reduction in the Ogden rate, with many estimating it will cost them £hundreds of millions a year and will necessitate increases in the premiums paid by policyholders.
What is the ‘Ogden rate cut’ and what does it mean for your insurance premiums?
The Lord Chancellor recently announced that, from 20 March 2017, the Odgen rate of discount will be reduced from 2.5% to -0.75%. But what does this actually mean?
A bit of background: what is the discount rate?
In simple terms, the discount rate affects the amount of compensation a person actually receives in the event of a personal injury claim. It works under the theory that compensation awarded to an injured party will gain interest over time, especially with larger awards for those who are most seriously injured. Because interest rates have dropped in recent years there were some calls to review the rate.
What does the change in the discount rate mean?
Changing the discount rate from 2.5% to -0.75% will have a major effect on both claimants and insurers resulting in huge increases in compensation payments.
For example, the insurer Allianz has demonstrated that if a 30 year old man earning £25,000 a year were seriously injured and required nursing care for the rest of his life, the current calculations would award him compensation of £2,791,000. Following the reduction in the Ogden rate the compensation would now be calculated as £6,325,000.
What does this mean for your insurance premiums?
In order to accommodate this change in the Ogden discount rate, insurers are expected to increase insurance premiums to help cover the costs, particularly in the areas most affected by personal injury claims costs. Therefore we can expect to see increases in premiums for motor, public liability, employers' liability, motor trade and SME package insurances.
PricewaterhouseCoopers warned that the average annual comprehensive motor premium will rise by up to £75 and young drivers could see increases up to £1,000.
Duncan Sutcliffe, director, Sutcliffe & Co, commented: “Whilst a review of the Ogden rate was necessary, the impact across the insurance industry will be significant and that will filter through to customers. For example, anyone needing private or commercial motor insurance will be affected, as will those requiring liability insurance for their business.
“I’d strongly encourage anyone who thinks they will be affected to speak with their insurance broker for further detail.”