We need to talk about Ogden: aka, the discount rate
What is the Ogden Discount rate and what does the recent rate drop mean? Bernard Dunn CA explains.
In February 2017, the Lord Chancellor announced a significant reduction to the Ogden Discount Rate of 2.5%, to the revised level of -0.75%, causing UK insurer shares’ to plummet and sparking reaction from the insurance industry.
While the rate drop was expected, the level of the decrease took the industry by surprise. The change may have significant implications on business and motor vehicle insurance premiums in the years ahead.
So, what is the Ogden Discount Rate?
- It is a calculation used by the courts to determine how much insurance companies should pay out to claimants in cases of life-changing injury.
- When victims of life-changing injuries accept lump sum compensation payments, the actual amount they receive is adjusted according to the interest they can expect to earn by investing it.
- The discount rate is linked, by law, to returns on the lowest risk investments – typically index-linked gilts. The yield on these gilts, or Government bonds, has fallen dramatically since 2001.
What does the rate drop mean?
The reduction in the rate means that those suffering from serious injuries will receive significantly higher compensation payments than in the past.
This change has caused insurers to revisit their reserves for existing claims to ensure they have sufficient funding set aside to meet future liabilities.
Aviva, for example, has announced that this change has increased its Combined Operating Ratio (incurred claims & expenses vs earned premiums) from 94.9% to 106.3%. QBE (one of the UKs largest liability insurers), has announced that it is setting aside an additional £182m in reserves.
Find out how the rate reduction affects you and how to mitigate the corresponding rise in insurance premiums.