As the Government slashes the discount rate used to calculate life-changing injury payouts, Hine Insurance explains what this means – and what impact it will have on your insurance.
Recent headlines have been dominated by the Ministry of Justice’s announcement that the Ogden discount rate is to be cut from +2.5% to -0.75% in March this year.
But what exactly does that mean? And what impact will it have on policyholders?
What is the Ogden discount rate?
It is a calculation used by the courts to determine how much insurance companies should pay out to claimants who have suffered life-changing injuries.
Insurers must calculate a single lump sum settlement figure which will accurately reflect the claimant’s future loss of earnings and cover the costs of their care. This sum is adjusted to account for the interest they can expect to earn by investing the lump sum.
To arrive at the right figure, a multiplier is applied to a calculation of the claimant’s financial needs – e.g. earnings net of tax, the cost of care needed. The multiplier takes into account age, gender, mortality risks and the interest that the lump sum will earn over the claimant’s lifetime.
The insurer must determine the appropriate rate of investment return on the capital sum paid in damages. This is the discount rate, the amount by which a lump sum is discounted to allow for interest on the sum provided today.
The Odgen Tables list the multipliers which apply at the various discount rates across a range of -2% to +3%.
The rate is set by the Lord Chancellor and was last changed in 2001.
What does this cut mean?
The discount rate has been cut from +2.5%. to -0.75%. This significant change is expected to cost the insurance industry millions of pounds as insurer payouts increase dramatically.
For example, suppose a 30-year-old male earning £25,000 annually is injured in a car accident. He will not be able to work again and will need nursing care costing £75,000 annually for the duration of his life.
Using a discount rate of +2.5% to determine the multiplier for a claimant matching his criteria, damages would be calculated to a payout of £2,791,000.
However, at a rate of -0.75% the same settlement rises to £6,325,000 – increasing the insurer’s payout by a further £3,534,000 or 127%.
The Association of British Insurers (ABI) called the decision to change the rate “crazy” and predicted the change would force insurers to drive up motor and liability premiums in an effort to balance the books.
Personal and commercial motor insurance premiums are likely to increase, with some insurers fearing young drivers will be worst hit. It may become more difficult to secure liability insurance and policies which incorporate personal injury cover.
The new rate will take effect from 20th March 2017.
Though it is understandable that the announcement has caused some initial turbulence, Hine Insurance will work with insurers to ensure we continue to find the most competitive arrangements for you.
If you have any questions about how this change affects you and your insurance, talk to one of our advisers on 0161 438 0000.