The Ogden Rate Change

The Government has taken the decision to make a significant change to the way in which the cost of serious injury claims are calculated with effect from 20th March 2017. This is likely to have an impact on our clients.

What is the Ogden Rate?

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The Discount Rate, also known as the Ogden Rate, forms part of the calculation to determine the level of award in respect of cases involving serious injury.

In the case of serious injury, the amount allocated towards loss of earnings and future cost of care can be high, as the settlement is designed to provide financial indemnity over a number of years. This is of course much higher where the seriously injured person is younger.

When such an award is made in a lump sum, it can equate to a considerable amount of money. As a result, an allowance is made by the courts in respect of future losses to reflect the fact that the claimant will be able to invest the lump sum awarded and earn interest on that investment over a period of time. The settlement is therefore ‘discounted’ by the amount of interest the claimant can expect to earn over that period.

The Discount Rate is linked to returns on low risk investments, typically Index-Linked Gilts.

What has changed?

The Discount Rate has changed from 2.5% to -0.75%. This means that, rather than any lump sum award being discounted to allow for a 2.5% investment return, the indemnity settlement will be increased, reflecting a decision that over the long term there is predicted to be a negative return on investment.

The effect of this change will be to increase the value of claims for future financial loss.

Whilst the percentage difference in the discount rate may seem small, to give an example how this would affect an insurer in monetary terms, a lump sum payout under the old discount rate would have been £2,791,000, under the new rate the lump sum will be £6,325,000!

What is the immediate effect on insurers?

This decision by the Lord Chancellor is a move that will wipe millions off the profits of the country’s largest insurance companies. It has been reported in the insurance press that this has had an immediate £7bn impact on insurers outstanding claims with a further £1.2bn additional annual cost predicted per annum. Some insurers are already predicting huge losses affecting share value.

As this also affects reinsurance, the cost an insurer needs to pay to a reinsurer will also rise.

How will this affect our clients?

This will mainly affect our clients who require motor fleet, commercial vehicle, employers, public and products liability insurance.

These are all insurances which inherently carry a risk of incurring a liability for a claim involving a serious injury. However, it may also affect property insurance policies where a liability insurance section of cover is included.

Due to the increased costs of claims settlement figures, there will be no option but for insurers to pass on the extra costs to clients and premiums will  increase, in particular for those insurance products that are affected, regardless of where the insurance policy is bought from.

How does this affect us as your insurance agent?

Mitchell Charlesworth Insurance Solutions demands from our insurers a focus on stable year on year pricing, cover levels and service to support our clients.

We do not agree to premium increases for the sake of supporting insurers and tend to consider inflation, changes to the business and claims as the only justifiable reasons for insurer cost increases year on year.

The Ogden Rate change has had an immediate impact on how we can negotiate with insurers who are now far less willing to reduce their initial renewal invite to fall in line with the previous years premium.  This will not prevent us from continuing these insurer discussions where we do not believe a renewal invite is reasonable.

However, we will continually be monitoring how this affects renewals we handle which will help us to advise our clients whether Ogden Rate change related increases are reasonable in comparison to other renewals we handle.

Our recommendation

We continue to recommend our clients take control of risk management, health and safety to make these a key element of your business practice and culture. Those who have claims are more likely to be affected by the Ogden Rate changes as this gives an insurer a reason to amend the annual premium compared to a policyholder with no claims.

Mitchell Charlesworth Insurance Solutions have partnered with Compass Risk Management to provide our clients with a competitive H & S solution, whether you just want some guidance or even provide you with a competent person responsible for your H & S.

If you have H & S consultancy support at present or if this is something you are considering to help relieve the burden upon yourself, please contact us so we can advise the services available on 0151 423 7500 and ask for Richard or Carrie.

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