The insurance industry has been hit with a number of major changes in the recent past, most recently a change in the Ogden Discount Rate. Insurance Partner Dan Bligh explains the significance of the rate for motor insurers and the consequences for drivers.
The Ogden Rate is a personal injury discount rate and is used to calculate compensation payments for people who have been injured in car or industrial accidents, or clinical negligence. It consists of a complex formula applied by the courts to the injured person so that they are given the necessary financial security to provide for their care and loss of earnings. The sum also takes into account mortality risks, and that the injured person will receive the lump sum up front which will be invested and earn interest for them.
Insurers had previously been hit in early 2017 when a surprise cut in the Ogden Rate moved it from 2.5% to -0.75% following a government review, which claimed that low risk investments such as gilts were no longer providing a return sufficient to justify the 2.5% rate. After a furious backlash from the insurance industry, the rate was then scaled back in 2018 to a proposed level of between 0% and 1%, meaning that insurance rates stabilised: the average car insurance premium dropped from £847 in the second quarter of 2017 to £752 in 2018.
The latest change to the Ogden Rate resets it at -0.25%, which will slightly reduce the amount that insurers need to pay out, although the industry had been expecting a higher figure, after the government’s Actuary Department published a 77-page analysis in June, recommending setting the rate at 0.25%.
Huw Evans, Director-General of the Association of British Insurers was outspoken in his view that the latest rate is “a bad outcome for insurance customers and taxpayers that will add costs rather than save money.”
Although these changes seem small, the Ogden Rate is used to calculate very large payouts, so the consequences for motor insurers are significant. It is likely that the average motor premium will increase by about £15-£25, however younger drivers, who are always classed as high risk, may see a £50-£75 rise in their premium. It therefore makes good sense to ask for advice from a broker or insurance representative to help evaluate whether their insurance cover remain accurate and that their premiums are as competitive as possible.