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Broker News - The Ogden Rate Change Impact

2017-03-16 09:57:18

The Ogden discount rate has been reduced

It was announced last week that the Ogden discount rate has been reduced from 2.5% to -0.75%, and the change will take effect from 20 March 2017. 

This is one of the most significant changes facing the industry in some time and will undoubtedly have a substantial impact so we thought it might be helpful to provide you with some key points to use in conversations with your clients.

What is the discount rate?

In a nutshell, it’s an assumption used in UK court cases to calculate the amount of compensation due today, for future losses in personal injury and fatal accident cases. Since 2001, the discount rate has been set at 2.5%.

The rate helps to allow for investment returns that a compensation payment may earn. In reality, the money may be invested widely, but discount rates aim to create a level playing field for the calculations. The lower the discount rate, the higher the initial lump sum settlement that has to be paid out by insurers.

Please see this illustration circulated by Allianz Insurance for an example of how the discount rate is used to calculate compensation payments and the way in which this change will impact our industry.

 Impact of the change

The reduction means that those suffering from serious injuries will receive significantly higher compensation payments from insurers than before.

The substantial increase affects claims costs for all lines of business which see claims for bodily injury – including Commercial Motor and Casualty (Employers Liability, Other Liability and Contractors Liability). As such, insurers will have no choice but to immediately consider pricing requirements in this new environment with premium increases anticipated between 10-35% depending on class. This will be an unwelcome change for insurers, brokers and clients alike but one that cannot be ignored.

 Find out more

Please speak to your CBC representative or see the ABI website.