In insurance circles, recent changes to the Ogden rate (or the Discount rate as it is otherwise known) have been big news. Businesses buying insurance however, seem less well informed – and, given the impact of an updated Ogden rate is felt most keenly by those actually buying insurance, it’s worth taking a few minutes to understand the changes and what they mean.
The Ogden rate is used to help work out the size of lump sum personal injury payouts. In essence, the rate calculates the amount a claimant could expect to earn in interest, if a lump sum was prudently invested, and deducts it from the payout.
If, for instance, a total payout was assessed at £100,000, and the Ogden rate was 2.5%, then the final payout would be £100,000 minus 2.5% of that, so £97,500.
Ogden Rate Change
Indeed, until recently, the Ogden rate was set at exactly that, 2.5%. Since March 2017, however, change has been in the air.
First, following a Ministry of Justice review, the rate was reduced to -0.75%. At the time of writing, that remains the case, and there have been significant implications, particularly for motor insurance.
That is, the new rate increases the cost of personal injury claims. Taking the example above, the same claim would pay out £100,750. That’s a difference of £3,250 on a single claim.
That might seem a relatively modest difference but take into account the impact of personal injury claims on motor insurance and a different picture emerges.
Every day, insurers pay out £27 million motor claims, and 51% of that total (£13.77 million) goes on personal injury claims. The 3.25% change to the Ogden rate means an extra payout of almost £450,000 per day, or more than £160 million annually.
Why Should You Care?
Well, ignore for a second the personal dimension – that, if you have been unfortunate enough to suffer a personal injury, you will have received moderately more than you would have before – then think about how insurers will seek to make up that £160 million in higher annual costs…
Yes, it’s fair to assume that the extras costs are being passed on in higher premiums – particularly motor and fleet premiums. Exactly how that has played out is not yet clear, but many predicted rate rises of between 10 and 20%.
No matter how you look at it, whether you are insuring one vehicle or a fleet, a hike on that scale is likely to be very bad news indeed.
What Can You Do?
First and foremost, it is important to get advice and guidance from a specialist – an insurance broker able to understand your needs and call on strong market relationships to help find a competitive premium. At Stonebridge, we can help to do exactly that.
We can also help you to identify and put in place any risk management measures that could help to reduce premiums.
But just as importantly, we can help you to say on top of further changes to the Ogden rate – and it seems that more change is on the way.
More Ogden Rate Change Coming?
It seems very likely that the Ogden rate will change again this year, to a figure somewhere between 0% and 1%.
Clearly, that will have further impacts on insurance premiums – at the very least, it will give brokers the opportunity to secure lower premiums.
However, exactly when that change will come is unclear. Depending on how you define ‘early’, the Ministry of Justice’ suggestion that it will come ‘early in 2018’ already looks unrealistic – so it is worth working with a broker that will keep up to date with any change and make sure you are able to maximise any benefits as and when the change comes.
You can read about our fleet insurance solutions here.