CHANGES TO THE OGDEN DISCOUNT RATE

The Facts

The Ogden Discount Rate is used in the mathematical formula to calculate the total compensation awarded to someone with a life-changing injury for loss of earnings and care. When injury victims accept lump sum compensation payments, the actual amount they receive is adjusted, according to the interest they can expect to earn on the payment from investment. This adjustment is set by the Ogden Discount Rate.

On 27 February 2017 The Lord Chancellor announced that the discount rate was to be reduced from 2.5% to -0.75%. This is the first time it has been changed since 2001.

The Result

Because interest rates are so low, the changes to a negative rate mean insurers will have to increase their pay-outs to a sum even higher than the initial award.

For example, at the existing rate of 2.5%, a thirty-year- old individual disabled in an accident and predicted to earn £20,000 a year until retirement at sixty-five, thereafter needing care determined at £100,000 a year, might receive a lump sum award of £3,414,350.

With the new discount rate, the same thirty-year- old individual is estimated to receive a lump sum award of £8,480,400.

The Impact and How We Can Help

The precise impact will vary from claim to claim but the more severe the injury and the longer the period of time that earnings are lost and care is required, the greater the impact of this change on the settlement amount.

The overall cost for the insurance industry across all current claims that are impacted is estimated to be £7bn. The estimated ongoing annual cost thereafter for the insurance industry is around £1.2bn per annum.

Insurers will be reviewing the estimates on outstanding motor and liability claims that are impacted and adjust them accordingly. This will lead to some significant estimate increases on some outstanding case reserves.

Given the scale of this change we anticipate many insurers will seek to apply price increases. There are a number of factors which can impact on the level of pricing increases applied to your premium and we would relish the opportunity to discuss these in more detail.

We will provide advice on implementing risk management strategies and consider alternative programme design on larger more complex risks. We will also conduct a thorough claims review.

Our Contact Details

Why not give us a call on 0141 221 9344 or visit our website www.affinitybrokers.co.uk?