This morning the Lord Chancellor and Justice Secretary David Gauke MP announced that the Ogden rate will be increased from -0.75% to -0.25%, reducing the amount insurers will have to pay to accident claimants. A reduction in claims payments sounds like a good message for insurers and consumers but this reduction is less than anticipated by most and comes off the back of the 2017 rate of -0.75% that the insurance industry challenged as being unsustainable and disproportionate. The new rate will be effective from 5 August 2019, and will be reviewed within a five-year period.
We have talked about the Ogden Rate in the past and its implications for the cost of personal injury claims. The increase is not as generous as many in the insurance sector had expected – including us.
Ogden Rate – a reminder
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.
The rate is argued about because it assumes that claimants are risk- averse investors and it needs to be set at a rate that ensures life changing circumstances are funded for over lengthy periods of time.
History of the Ogden rate
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 causing all insurers to cry with angst at the implications for the cost of personal injury claims and the costs that insurance buyers would incur. Many thought the rate went through the barriers of affordability and would impact the very principle of affordable risk transfer.
So what – who cares?
Buyers of Motor, Employers Liability and Public Liability insurance – that’s who. We would predict that the costs of insurance will rise again as insurer’s price in the effects of this change. Most insurers had already factored into pricing a more significant change to the Ogden rate. At best those with a more positive outlook might argue that the rate of decrease will slow. In particular, major areas of the economy such as Road Hauliers, Commercial Fleet Operators, Public Bodies, Construction and Agriculture are likely to see increased scrutiny of Health and Safety practices and insurers hardening of attitude to risk acceptance.
The Association of British Insurers (ABI) have already stated publically:
“This is a bad outcome for insurance customers and taxpayers that will add costs rather than save customers money,” Huw Evans, director general of the ABI.
Insurers have universally responded negatively and with disappointment around the balance between fair compensation and the ability to write insurance profitably. In simple terms, insurers are not getting enough premium to cover catastrophic personal injury claims and the cost of these will overwhelm costs premium. Claimants they state are being over- compensated.
There is an opposing view – those of the claimant litigation lawyers and consumer organisations who will point to insurer profits, claims handling certainty, lack of investment opportunity for claimants and insurer duties in fulfilling their fundamental role.