Ogden Discount Rate 2017

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What is the Ogden Discount Rate?

The Ogden rate, also known as discount rate or personal injury rate, is used by courts to calculate the compensation an insurance company should pay to a customer that was involved in a life-changing accident.

What is the Ogden Rate based on?

The rate is based on an index-linked government stock and is supposed to calculate how much interest the invested money will earn in the future.

What is the current rate?

The current rate is 2.5% and was set in 2001 before the financial crisis in 2008.

What will be the new rate?

On the 27th of February, the Lord Chancellors announced to adjust the rate from +2.5% to -0.75%, a net reduction of -3.25% overall.

When will the new rate come into effect?

20th March 2017.

How is compensation calculated?

In the case you are involved in a life-changing accident, you might accept lump-sum payments, that are adjusted to the interest you receive when you are investing the money.

Why are changes implemented?

The yields of index-linked gilts have crashed since the crisis, on which the discount rate is based on by law. Thus, affected people might running out of money due to increasing future costs. The Ministry of Law launched a review of the outdated formula used by the court, to ensure sufficient future payments.

How will that affect the Ogden Rate formula?

Example – if you, as a claimant, would ask to cover for £1,000 losses, the insurance company would need to pay £975 using the old rate.
Ogden Rate = £1,000 x 0.025 (+2.5%) = +£25
Lump-sum = £1,000 – (+£25) = £975

Because of the rate change insurers would need to pay £1,007.5 instead:

Ogden Rate = £1,000 x -0,0075 (-0.75%) = -£7.5
Lump-sum = £1,000 – (-£7.5) = £1,007.50

Essentially meaning that it now costs insurers more to pay out a claim than the claim itself.

How will it impact individuals claiming injury compensation?

This rate will ensure that you as a risk averse investor, will receive sufficient payment for the rest of your life covering loss of future earnings and   care costs, considering that you might depend on this lump-sum for the rest of your life.

How will it impact insurance customers?

This vast rate change was not predicted by the insurance industry, thus leading to a loss for insurance companies. It is estimated that 36m individual and business motor insurance policies could be affected to compensate the big number of future claimants per year.

Why prices of insurance policies might change?

The unexpected change on top of the increasing insurance premium tax, will influence premiums to cover future claims. Although the competitive insurance industry might be able to adapt, certain premiums for motor insurance policies are expected to increase.

Who will be affected the most?

Motor insurance policies are based on a risk evaluation. Given that, 85% of young people are involved in accidents, the following groups are expected to be affected the most.

Young driver (18-22 years old): up to £1000 increase of premiums.

Older driver (65+): up to £300 increase of premiums.

Average driver: 50£ to 75£ increase of premiums.

Are small-business owners affected?

Changes might have an adverse impact on both the paid motor insurance prices paid by drivers as well as commercial insurance rates paid by SME’s. Additionally, the reinsurance and liability reinsurance prices might be impacted as well.

How does it impact on insurers?

The rate changes have been displayed in Direct Lines company report, costing the firm £217m profits. On the day of the announcement, the stock price of Admiral and Direct Line, dropped by 8.3% and 7.4%.