The impact of the Ogden discount rate on insurance companies and buyers
The shocking fall of the Ogden discount rate in February from 2.5% to -0.75% put UK insurers into a tailspin. Well below the 1-1.5% slash they had imagined it would be, it is set to scratch millions off of the profits of the country’s biggest insurers. This is the first time the rate has been changed in 16 years. How will this affect insurers and customers?
What is the Ogden rate?
The Ogden Discount Rate makes sure a severely injured person has financial security; it is a lump-sum pay out that provides for their care, treatment and loss of earnings. The Discount Rate is to calculate, in the government’s words, “the actual amount they receive … adjusted according to the interest they can expect to earn by investing it.”
The Discount Rate’s original rate was based on a three-year average of yields on Index Linked Gilts; but as interest rates dropped and didn’t recover since 2008, the rate was, as far as the government’s concerned, long overdue for revision. Simply put, when interest rates dropped, claimants had less money compared to pre-2008 rates.
Buyers Impact: those buying insurance will likely see claims costs soar this year and into 2018.
Insurance premiums are to rise as payouts become larger and insurers swallow this cost. Personal and commercial car insurance premiums will rise, with potentially 36million policies affected by the rate change.
However, claimants will now have more money in their pocket compared to the old rate. As the lump-sum payouts are expected to last the claimant their lifetime, literally putting more money in their pockets, on the face of it seems like a noble idea. Whether this is worth companies and non-claimants paying more for it remains to be seen.
Companies Impact: the payout cost for insurers will go up – that’s a given. On the old system, insurance companies would pay below the threshold of loss. So, if the payout was £1000, the insurer had to pay £975 as the 2.5% interest on the initial lump sum would make the year-end figure £1000. However, under the new system in this example, insurers have to pay above this threshold: £1007.50. As these figures hit the millions it’s easy to see how much more insurers will be paying out.
Even the NHS will be hit by the change, with a potential £1billion hike in compensation bills with fears that more money could disappear from coffers into the hands of no-win-no-fee lawyers.
Small businesses may also take a hit, facing higher commercial insurance rates that protect them against liability claims, like a member of the public falling over in a workplace.
What should you do? Shop around and don’t be afraid to switch providers. At BQI Insurance, we’re fiercely independent, with a portfolio of services and insurance products to meet your needs. Call our team of experts today to find out how we can help.