Ogden Rate

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car crash

The government recently announced an adjustment to the Personal Injury Discount Rate. Also known as the Ogden Rate, it is used to calculate the amount of compensation awarded to victims of life-changing injuries and affects the price everyone pays for car insurance.

The Ministry of Justice changed the rate from minus 0.75% to minus 0.25% for England and Wales. Scotland sets its own rate.

These figures refer to the reduction of the lump-sum compensation payments awarded in accident and injury cases. Minus 0.25% is a higher figure than minus 0.75% which means claimants will now receive smaller payouts.

What does it mean for you?

According to which mainstream media source you listen to, it’s either good news or bad news for drivers. For example, the Mirror claims car insurance will get cheaper for millions of people, while the Guardian interprets this to mean that bills will rise, especially for young drivers.

So, which is it?

The government claims the previous 0.75% rate had “led to concerns that claimants were being substantially over-compensated” and increased pressure on the budgets of public services to cover personal injury liabilities, which in turn meant larger bills for tax-payers.

The move by the Ministry of Justice also appears intended to reduce the cost of insurance. The higher the Ogden rate, the lower the compensation awarded and the lower the cost to compensators, such as insurers and the NHS.

The minus 0.75% figure had been in place since 2017, prior to that calculations had been based on a positive 2.5% rate. The government says the new rate is a “more balanced approach to compensate personal injury claims”.

The new figure, which became official on 5th August, was recommended in an impact assessment compiled in consultation with lawyers, insurers, investment experts and public bodies.

Why does the personal injury discount-rate exist in the first place?

The objective is to put victims in the same financial situation as if they had never been injured in the first place. The amount awarded should be based on their financial needs with respect to future loss of income, as well as taking into account expenses for medical care and personal assistance.

A payment made to claimants is expected to be invested to provide a life-long income. Such investments can then increase or decrease in value over time. Inflation, tax and the rise in the cost of living are factored into the calculations. So the discount rate is meant to ensure people receive no more or less than the amount they were awarded.

The positive 2.5% rate existed from 2001 until 2017 when the negative 0.75% rate was decided. A provision for re-evaluating the amount every five years with respect to prevailing economic conditions has now also been introduced following the Civil Liability Act 2018.

The Association of Personal Injury Lawyers (APIL) welcomed the decision as an end to the “uncertainty” created by the government’s classification of injured people as low-risk investors, but said it would “remain vigilant” to ensure the new rate delivered fair compensation.

“The government has faced sustained pressure from the insurance industry to set a rate which would not be appropriate for injured people, who should not be forced to take any risk with their investments,” the APIL said in a statement.

Will the personal injury discount rate change raise costs?

Huw Evans of the Association of British Insurers (ABI) called the decision a “bad outcome for insurance customers and taxpayers” which would indeed increase costs.

“This will remain the lowest discount rate in the western world, leaving England and Wales an international outlier at a time when we need to boost our attraction to international capital,” he said.

In a letter Mr Evans wrote to Lord Chancellor and Justice Secretary David Gauke, he confirmed why the cost of car insurance would now increase.

The letter called the impact assessment which influenced the rate change “misleading and wholly disingenuous”.

Mr Evans stated that, following the introduction of the minus 0.75% rate in 2017, government statements had led the insurance industry to assume a new rate of between 0 and 1% would soon be introduced and insurers based their calculations on these rates to keep costs and premiums low.

The letter said that the impact assessment comparing the new minus 0.25% figure to the previous rate of minus 0.75% and estimating a “saving” to insurers of £230m to £320m was “inappropriate”.

“Your department can be in no doubt this is not an accurate reflection of the current market situation because it has worked so hard with HM Treasury over the last two and a half years to ensure it never became so,” Mr Evans wrote.

“No such saving exists to be passed onto customers.”

So, in a nutshell, as the new rate is lower than expected, insurers will have to increase their budgets to cover future claims which will, in turn, increase the pressure on premiums.

How much will costs increase?

On the other hand, Mohammad Khan, of Price Waterhouse Coopers (PwC), said the insurance industry would “broadly welcome the announcement”.

“Ever since the announcement from Government to review the discount rate back in September 2017, the insurance industry expected the Ogden discount rate to increase from -0.75% and has consequently been pricing motor insurance and settling insurance claims at a rate higher than -0.75% - typically between 0% and 1%,” he said.

"In real terms, this means that UK motorists have been paying lower insurance premiums compared to what the industry could have charged them if they assumed the Ogden discount rate was -0.75%.”

Mr Khan estimated that the average motor insurance premium would now probably increase by between £15 and £25, but younger drivers would face an increase of £50 to £75.

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