The Ogden rate is used to calculate the compensation amount due to claimants in personal injury claims where there is serious injury. The rate has consistently been at 2.5% since 2001, it was reduced drastically to -0.75% in March 2017.
It has been announced that the Ogden discount rate will be increasing from -0.75% to -0.25% as of 5th August 2019.
Whilst an increased rate appears beneficial to insurers, in reality it is a massive blow to the industry. The insurance industry had been expecting an increase to between 0% and 1% based on Government guidance.
For example, a 24 year old employee earning £40,000 who is seriously injured and unable to work again. One element of their claim would be Loss of Earnings; insurers would have been reserving £1,586,000 before the change. Based on the new discount rate, the updated reserve for this would be £1,874,800.
This difference of £288,800 relates to one aspect of one claim. When considering the thousands of claims that are in the market, the impact of this rate change begins to become apparent.
The impact is that insurers are having to tie up more capital to cover their claims reserves. This means unexpected cash flow problems and increased premiums to ensure that there is enough money in the pot.
Many insurers have publicised the financial impact of the rate change on their books. For example QBE has posted a £50m hit and Admiral revealed a £33.3m impact in the first half of the year, with the expectation of the total hit to reach £50-60m by the end of 2019.
With Lothbury’s risk analysis, marketing strategies and relationships we can seek out comprehensive policy coverage and competitive premium rates even in the current insurance climate.