New Ogden discount rate leads to higher premiums
CLA (Risk Solutions) Ltd
With effect from 5th August 2019, the Ogden discount rate changed from -0.75% to -0.25%.
Why will this lead to higher premiums?
To understand this, you will need a bit of back-history.
What is the Ogden discount rate and how does it work?
Named after Sir Michael Ogden QC, who was the chairman of the working party that established the Ogden tables.
They are used to adjust the compensation a claimant will receive after sustaining a life-changing insured injury.
There are a variety of tables that can be used to calculate the discount rate such as; how to calculate life expectancy, a multiplier for lifetime loss, value of a single loss in the future and a multiplier for loss over a period.
For example, if you are involved in a life-changing accident that you are covered for under your insurance policy, you will be entitled to compensation to cover hospital treatment, care and loss of earnings.
This figure is then reduced by the discount rate to allow for the likely income achieved after investing the lump sum.
Using the tables, a figure can be established to show how much a compensation lump sum is adjusted after calculating the expected return on investment.
The higher the Ogden discount rate, the lower the payout from insurers.
The rate was set at 2.5% and had remained at that rate since 2001.
Then in 2017 the rate was reviewed and changed to -0.75%.
The large decrease was justified because of the lower yields achieved on investments during the period.
This resulted in increases in insurance premiums for customers buying insurance but a better outcome for claimants who would not have to take risks with their invested compensation funds.
Why will this affect my insurance premiums?
Many insurance providers believe that even at the new level of -0.25%, claimants are being over-compensated and think a further review will be necessary, adding more turmoil to the market.
The below 0% figure continues to assume a low-risk investment return.
Most insurance providers were expecting the new rate to be set between 0 and 1% and made assessments based on this figure.
Though under the new rate, they will have to pay out less to claimants, they are warning that this could still lead to higher insurance premiums in the future because keeping the rate below 0% maintains high claims settlements.
Winners and losers It looks like we will all be paying more for our motor and liability insurance in future with premiums already rising since the announcement was made.
However, personal injury lawyers have welcomed the restraint in increasing the Ogden rates stating that claimants who have suffered life-changing injuries will be able to maintain a steady income from their lump sum from low-risk investments and avoid the risk of short term swings and losses from riskier investments.
CLA Risk Solutions, with access to a range of insurance providers, will be able to research the market to find you the most cost-effective insurance policy for your needs.
As your local insurance broker based in Sutton Coldfield and Stafford, we cover the whole of the West Midlands and can offer a range of business, personal and liability insurance.
Call 0121 320 4600 to discuss your requirements.