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. Prior to 2017 the rate was fixed at 2.5%, however 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 applied retrospectively to claims, therefore reserves had to be reviewed and amended.

The change was anticipated to have ‘profound financial consequences’, with insurers incurring significant additional costs, with classes such as Motor and Liability particularly affected, along with any class of insurance with an exposure to personal injury.

For example:

Based on the Ogden rate of 2.5%, a 21 year old male who had been injured and looking at a future of nursing care and loss of earnings totalling £9,072,028, once the amended rate of -0.75% was applied the claim costs increased to £20,023,103. As you can see from this example, the change in the Ogden discount rate from +2.5% to -0.75% reflected a significant increase in the total settlement of a claim.

The material impact on insurers’ balance sheets was unavoidable and not surprisingly the insurers appealed against the decision.

There was slight improvement made in 2019. This saw the discount rate come back to minus 0.25%. However, the overall movement had still been severe, with the negative discount rate being a significant driver of increased motor and liability premiums.

We urge all businesses to review their current limits of indemnity, to ensure that these remain adequate given the significant implications of the Ogden Discount rate

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