“Significant Change in claim settlement calculations”
The Lord Chancellor changes Ogden Discount Rate from 2.5% to -0.75% and it significantly affects insurance premiums
What is the Ogden discount rate?
In the settlement of insurance claims, the Ogden discount rate is used to calculate the amount of compensation a severely injured person will receive to reflect the return they will earn when that money is invested. The objective is to make sure a person has the necessary financial security to provide for their care and loss of earnings.
Allianz has put together a really helpful illustration of how the discount rate is used to calculate compensation payments and the way in which this change will impact the insurance industry.
The announcement came last Monday (27th February) that the Ogden discount rate has been reduced from 2.5% to -0.75%, and the change will take effect from 20th March 2017.
This is one of the most significant changes facing the UK insurance industry in some time, and will undoubtedly have a substantial impact.
Impact of the change
The reduction means that those suffering from serious injuries will receive significantly higher compensation payments than before.
For example, someone who received £2.791m before the discount change, will now receive £6.325m – an increase in the amount the insurer will need to pay of £3.534m or 127%.
The substantial increase affects claims costs and therefore premiums for all Policy types which see claims for bodily injury – particularly Private and Commercial Motor, Motor Trade, Liability and SME.
Changes are immediate in some cases and we have already started to see the impact coming through from our insurer partners; some have indicated they have no choice but to immediately consider their pricing requirements in this new environment which will result in premium increases. Those clients who operate in high risk liability industries are likely to be most affected.
We are reviewing and can provide insurance and risk management strategy advice to address the increased risks this change will make to ensure our clients continue to get value from insurance premiums with robust protection.
To find out how we can help reduce the impact, call us on 0121 213 6420