When the Chancellor announced he was cutting the Ogden rate (also known as the discount rate or personal injury rate) from 2.5% to -0.75%, it sent shock waves through the insurance industry.
Following the introduction of the new rate in March 2017, a consultation with interested parties was set up to determine how the rate should be set in the future. Many believe the way the new rate was decided, is not reflective of how injured claimants invest the pay out they receive. The consultation was due to end August 2nd 2017, but this deadline was not met, and there is currently no new date set. When the consultation period has finally ended, the government will reveal how they’ll set the rate in future – and whether they would consider amending the rate. Although any change to the rate requires an act of parliament and is likely to take some time. In the meantime, the rate of -0.75% still stands.
What is the Ogden rate?
When a lump sum is paid as compensation for a personal injury claim, the money can be invested to earn interest. The Ogden rate is the amount the payment is adjusted by to ‘balance the books’ and offset this interest. In the past, for every £1,000 awarded, the insurer paid out £975. The money invested would earn 2.5% interest to give the claimant their full amount. Now with the slashed rate, the insurer will be expected to pay £1,007.50.
What impact will this have?
It’s estimated that the change will cost insurers £3.5bn – with even greater long-term losses likely. After the announcement, shares across the industry fell by 7% . But the impact will also be felt by the consumer, as insurers will have no option but to increase premiums for motor insurance (private and business) as well as employer liability, public liability and product liability insurance.
If you’d like to find out more about how this change will work in practice, take a look at our useful infographic.
Did you like this blog? Sign up to our newsletter for regular updates.