What has happened?
The Ministry of Justice has announced that it will cut the Ogden discount rate, a calculation used to determine lump sum compensation to claimants who have suffered life-changing injuries, from 2.5 per cent to minus 0.75 per cent. The news came as a shock to the Insurance industry, which had widely expected the rate to fall between 1.5pc and 1pc and the entire industry is highlighting that this will have a huge impact on premiums. This change took effect from 20th March 2017, marking the first time the rate has been changed since 2001. The move will cost the insurance industry millions of pounds and the car insurance premiums of 36 million drivers are set to rise in order to fund higher pay-outs to victims of serious accidents.
What is the Ogden rate?
When deciding on the level of compensation pay-outs, Insurers have been allowed to apply a discount rate to overall settlement awards to allow for the amount of interest that could be accrued on pay-outs. This discount is set by the Courts and is known as the Ogden rate. It has been set at a level of 2.5% since 2001.
Why has it changed?
The Government now says that this discount level is inappropriate, as interest rates have decreased considerably since 2001 and they do not believe that pay-outs are adequate. They are adjusting the discount rate to allow for higher compensation awards.
What will it mean for drivers?
Car insurance premiums will rise substantially in order to fund higher pay-outs to victims of serious accidents, as insurers have to set aside substantially more funding to pay for these larger compensation awards. This change will apply to outstanding claims, as well as claims going forward. Early indications suggest that an average car insurance policy is likely to cost £50 to £75 more each year, whilst young drivers could face up to £1,000 in extra costs.
This table1 shows just how big an impact the change could make on claims payments:
|@ 2.5% Ogden rate||@ -0.75% Ogden rate|
|Age||Gender||Claim size||Claim size||Claim size|