The Ogden Effect
The Ogden Rate has been slashed by the Government from +2.5% to -0.75%.
Is that good – it sounds good doesn’t it?…
What is the Ogden rate in any case?
What will it mean for businesses in the UK?
First of all we had better understand what the Ogden rate is….
Well, the Ogden discount rate is a calculation applied to determine the amount of money insurers should pay out to people who have suffered serious life changing injuries. The calculation is designed to allow adequately for the claimants future losses and costs. Any settlement amount should represent the claimant’s future loss of earnings and any nursing or care costs. However, the settlement figure is paid as a one-off lump sum. This theoretically will be invested so the settlement amount is adjusted to allow for the interest the claimant would expect to earn. The Ogden Rate is the discount that can be applied to reduce the settlement to allow for the growth on the payment.
In practice the settlement will be based on the claimant’s life expectancy, a multiple of financial needs, their lost earnings and the cost of care. Gender, age and mortality risks are also taken into account. The Ogden Rate is then applied to counter the interest on the lump sum.
A low rate = a higher settlement!!
The Ogden Rate Tables give the multipliers which apply across a range of -2% t0 +3%. The rate has been at +2.5% since 2001 but the Lord Chancellor earlier this year slashed the rate to -0.75%. Presumably this was due to lower interest rates on investment funds in recent years.
The new rate means payments for serious injuries will be much higher!
a settlement of £2,791,000 calculated using the old rate would now reach £3,534,000 or 127%.
So what does this mean for UK Businesses?
The change in the Ogden discount rate from +2.5% to -0.75% signifies a huge rise in claim settlements. This will mean insurers need to reconsider the premiums they charge for those classes of insurance which cover bodily injury claims such as commercial combined Employers Liability, Public Liability and Motor Fleet.
Huw Evans, Director General of the Association of British Insurers (ABI), said the change was “a crazy decision”.
“Claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK.”
Can InEvexco help?
We can’t guarantee to avoid all future premium increases likely from insurers but we believe we’ll be able to minimise most additional costs due to the good running of our specialist insurance schemes for exhibition contractors and exhibition organisers. We will have to wait for the true effect of the Ogden Rate reduction on insurers loss ratios. One thing is clear, they will find it harder to make a profit.