When assessing lump sum awards for personal injury claimants, courts take into account the net rate of return (discount) that the claimant might expect to receive from a reasonably prudent investment of lump sum compensation. Since 2001, this rate has been 2.5%.
On the 7th December 2016, It was announced that a review of the Discount Rate would be undertaken and the decision was reached to reduce the discount rate by 3.25 points to -0.75%, with effect from 20th March 2017. This rate change applies retrospectively to all current claims, therefore current reserves may be reviewed and amended, as well as new claims.
This change will have ‘profound financial consequences’ and insurers will incur significant additional costs with classes such as Motor and Liability particularly affected, along with any class of insurance where there is an exposure to personal injury.
Based on the Ogden rate of 2.5%, a 21 year old male who has been injured and is looking at a future of nursing care and loss of earnings totalling £9,072,028, with the new rate of -0.75% the nursing care and loss of earnings increases to £20,023,103. As you can see from this example, the change in the Ogden discount rate from +2.5% to -0.75% reflects a significant increase in the total settlement of a claim.
This will have a material impact on insurers’ balance sheets and unfortunately means they will be looking to recover this increase in claims and reservations for claims through increasing premiums.
Will the rate stay at -0.75%?
On 7th September 2017, it was announced that, after a consultation, the Ministry of Justice has proposed a rate of between 0% and 1% in draft legislation, however the rate currently remains at -0.75%.
We do however urge all businesses to review their current limits of indemnity and will do all we can to ensure that the most competitive market terms are obtained. If you are not currently insured with Insurance2day, simply complete our pre-renewal contact request form and we endeavour to source you the most competitive market terms available.