Posted on: 06 November 2019
How the rates affect financial compensation
Earlier this year, the then Lord Chancellor David Gauke announced a new Ogden Rate (also known as the Discount Rate) of -0.25 per cent for personal injury awards. This new rate, which represents a 0.5 per cent increase from the rate of -0.75 per cent, came into effect on 5th August 2019.
The government decided to increase the Ogden Rate after the current rate led to concerns that victims of life-changing injuries (claimants) were being significantly overcompensated, thus increasing financial pressure on public services, such as the NHS. However, a smaller than expected rise in the rate has resulted in widespread disappointment from insurers.
The Ogden Rate
In personal injury cases, the courts and insurance providers use the Ogden Rate to determine the present value of compensation that should be paid to a claimant for their future financial losses (e.g. loss of future earnings and medical care costs). Applying this rate to the compensation total is intended to ensure that claimants receive the full compensation they were awarded, no more no less, by considering what they are likely to earn on that money before they are expected to spend it.
The previous rate of -0.75 per cent was set in 2017 when it was significantly lowered by 3.25 per cent (i.e. from +2.50%). This announcement led to significant criticism from insurers and the public alike, as many people argued the change would offer too much compensation for claimants and generate costly consequences for taxpayers and their insurance premiums.
By implementing the Civil Liability Act 2018, the government introduced measures to reform the law on how the Ogden Rate is set. Before these reforms, there were no fixed intervals in place that established when the rate needed to be reviewed. For instance, before the rate revision in 2017, the previous rate was set in 2001. Going forward, the rate will now be reviewed every five years.
The new Ogden Rate will increase the current rate by 0.5 per cent, to -0.25 per cent. In practice, this rate can be represented as follows: A 30-year-old male possesses annual financial costs, which could be mortgage payments or other bank loans, of £50,000. Under the existing -0.75 per cent rate, he would be awarded £2,935,500. The age of the claimant is taken into account to find how close they are to their life expectancy. Under the new rate of -0.25 per cent, he would be awarded £2,565,250, which is £370,250 less. The amount is less because the Ogden rate takes into account how much the claimant could have if they invested the money they receive.
Response and implications
Although the Ogden Rate has been increased, insurers have voiced disappointment in the new rate, saying it ‘doesn’t go far enough’. Indeed, there was a general expectation in the market that the new rate would be between zero and 1 per cent. As a result, many insurers believe that claimants will remain overcompensated with the new rate.
Concerning the implications for policyholders, insurance experts estimate that the new rate may cause insurance premiums to increase for policies with personal injury exposures such as Motor, Employers Liability and Public Liability.
Source – Zywave inc. – News Brief – Government Increases Ogden Rate
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Business Guidance24 September 2019
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