Your insurance premium increases – The Ogden Rate
You may have heard in the media that insurance premiums will be on the increase, for people outside our industry this just appears to be insurers increasing premiums across the board because they can. The reality is actually somewhat different.
How does this affect your premium?Clearly it is still early days but one thing is certain, policies that have the ability to cover injury will be affected by the change. Anything that has a Motor element is an obvious class of business to see an increase, but the effects to business can be wide, Manufacturing, Construction, Haulage to name a few. Wherever cover is provided such as Public & Products Liability, Employers Liability and Motor will see premium increases.
Why it’s happeningIn February 2017 the Lord Chancellor Liz Truss changed the Discount rate which is used to calculate the amount of compensation that is paid to injured individuals.
The discount Rate forms part of the calculation to determine the level of award in respect of serious injury, although made up of many reasons it’s based on the cost of care, loss of earnings amongst others.
When calculating the loss of future earnings the courts use the Ogden Rate to assess future losses, so the younger the person injured the longer potential loss of earnings. Where injuries are so severe there is potential that the individual will not work for the remainder of their life. The cost of annual care is significant estimated approximately £75,000pa*
An allowance is made by the courts of future losses to reflect where the claimant will be able to invest the lump sum injury payment and earn interest over a period of time. Any settlement awarded is discounted by the amount of interest the claimant can expect to earn, this is known as the discount rate and is linked to investment returns.
So what has changed?Until 19th March 2017 the discount rate was 2.5%, this has now changed to -0.75% on or after 20th March, in simple terms where a discount rate was being applied to an award this now in effect has increased the award, not reduced it.
The impact on insurers will be considerable, below are a few examples that will give an idea of the increases.
30 year old construction worker with traumatic brain injury, settlement before change £2.4m, after the change £6.14m
18 year old with spinal cord injury, settlement before change £7.6m, after change £19.3m
55 year old male who sustained a below joint amputation before change £1.4m after change £2.05m
(Examples provided by Axa Insurance – March 2017) The change in the discount rate has made a significant increase to the amount of settlements made by insurers in respect of serious injury.
The overall effect is that the cost to the insurance industry is in £Billions.