The government recently announced a major change to the Ogden rate, the rate used to calculate how much money insurance companies must pay out to those who have suffered life-changing injuries to take care of their financial needs up to their normal retirement date, or in some cases for the rest of their lives.
The rate, which was last changed back in 2001, is calculated by reference to returns on low-risk investments such as index-linked gilt-edged government stocks. The sum payable is adjusted using the discount rate, and takes into account the amount of interest a claimant might receive if the money were to be invested.
What is the new rate?
The change in the Ogden rate will be applied to all personal injury damages awarded on or after 20th March 2017. As interest rates are at historically low levels, the rate has been revised down from 2.5 per cent to a negative figure, – 0.75 per cent. The new rate currently only applies in England and Wales; in Scotland and Northern Ireland, the devolved parliaments will need to take their own decisions.
How the Ogden rate works in practice
The new rate means that a pay-out made to a claimant will be much higher than the same settlement would have been under the old rate. For example, let’s take a male aged 30 and earning £25,000 per annum. Nursing care is estimated at £75,000 per annum. No allowance is made for further adjustments.
Under the old rate of 2.5%, the multiplier for the loss of earnings up to age 65 would have been 22.84 (£25,000 x 22.84 = £571,000) and for nursing care for life 29.60 (£75,000 x 29.60 = £2,220,000). A total payment of £2,791,000.
Under the new rate of (-)0.75%, the multipliers change to 38.71 (£25,000 x 38.71 = £967,750) and 71.43 (£75,000 x 71.43 = £5,357,250) respectively. A total payment of £6,325,000, an increase of £3,534,000.
What effect will the rate change have?
Experts have calculated that the cost to the UK Insurance Industry is likely to be over £5.8bn. The taxpayer could have to foot a £1bn bill for the increase in the value of claims brought against the NHS.
As a result of the change, the cost of a personal injury claim is going to rise, and all insurers are going to have to increase their reserves on existing claims to ensure that future liabilities can be met.
We expect this increase to have a major impact on large casualty claims. This means that rates will need to be reviewed for those parts of the business that are more likely to be directly affected by the change, and premiums will have to be revised upwards. This includes policies such as Personal Accident, Employers’ Liability, Contractors’ Liability, Public Liability, and Product Liability Insurance.
However, as the increase in the rate is likely to create additional requests from clients, who may need reassurance that their policy still represents good value for money and remains competitive, it does provide brokers with an opportunity to demonstrate their professional knowledge and to offer clients a comprehensive service.
What are the key points to get over to clients?
Coming as it does on top of the recent increase in Insurance Premium Tax (IPT), this change will need to be carefully communicated to clients as soon as possible. It’s important to stress that this rate increase is a government directive, and not a measure introduced by the insurance industry, and as a result, rates will have to increase.
Is there a need for higher limits of liability?
Injury claim pay-outs are now potentially higher than before. There is an obvious need to consider whether higher limits of cover are now required for both Public Liability and Employers Liability. We currently have markets for both of these products. Get in touch to find out more.
Focus View – Toby Catlin, General Manager
The Ogden discount rate change is the biggest development in the insurance market since 9/11. I remember quoting £250 for a Public Liability policy and after 9/11 the same quote went up to £2,500. The market is currently showing some changes in appetite and rating, but there is a long way to go. Reinsurance contracts will mostly be up for renewal come the start of next year and the months leading up to this may see some significant changes in insurers’ appetite and rating. With the need for some clients to have higher limits of indemnity, we will be offering excess of loss quotations for Employers Liability and Public/Products Liability lines of business in order to assist our brokers and their client.
Where to get further information
If you have any queries, or are unsure how the revised rate might impact policy premiums, then please contact us on 0345 345 0777, we will be happy to help.