In the last week it was announced that an outcome of the current review should be completed by August 2019.
We have blogged previously about the Ogden Rate (also known as the discount rate) and the impact that changes to it have on insurance premiums. The reduction in the rate was met with disbelief by insurers given the substantial impact on personal injury cost calculations. A review was called for to seek a sense of fairness and I would argue affordability to customers buying motor and liability insurance. The impact on the NHS wouldn’t have gone unnoticed with the Treasury either.
We thought now would be as good a time as any to review where we currently are and where the Ogden Rate may end up.
What is the Ogden Rate?
When someone suffers life changing or catastrophic injuries from an insured event, they are rightly entitled to a compensation payment that will cover amongst other things; care, ongoing treatment and loss of earnings.
Most individuals choose to receive the compensation payment as a lump sum. When this is the case, the sum awarded is then adjusted by the amount that the individual can expect to earn when the lump sum is invested. This adjustment is referred to as the Ogden rate (or discount rate).
Because the discount rate is applied to claims which are worth millions, just a small change can have a significant impact. If the rate is lowered, the cost of personal injury claims to insurers rises. This rise is ultimately passed on to insurance buyers through increased premiums.
How has the Ogden Rate changed?
• Prior to February 2017 the Ogden rate had been set at 2.5% and hadn’t been changed for 16 years
• The Ogden rate was reviewed and reduced to -0.75% in March 2017
• This was not expected by the industry and had wide-ranging impact with motor and liability insurers making reserving provisions in significant numbers
• The Ogden rate received attention again, to be reviewed as part of the Civil Liability Bill 2018
What happens next?
The Civil Liability Bill received Royal assent on the 20th December meaning the timeframe for the Ogden Rate to be reviewed had been set.
In the last week the Lord Chancellor announced that this review will be completed on or before the 5th August 2019. Observers suggest that the rate is likely to be placed somewhere between 0% and 1% – so let’s go with 0.5% as a prediction in an uncertain world.
We are keeping a close eye on this at Anthony Jones given the significant impact that any changes have on insurance premiums and therefore our customers.