Ogden – what are the real term implications to us?

The Background

When a personal injury claim occurs and a lump sum is paid as compensation for life-changing injuries, the amount awarded is adjusted to compensate for the amount of interest the claimant can expect to earn by investing it to ensure that they are never under- or over-compensated. The amount by which this is adjusted is known as the Discount Rate, but is often referred to as simply the Ogden rate. It is applied by the courts to an amount calculated to cover loss of earnings and any care costs for claimants

Until recently, the Ogden rate has been set at 2.5%, meaning that for every £1,000 of loss calculated, the insurer will pay out £975. The claimant would then be expected to earn 2.5% interest a year, earning them the full payment they are due.

In Real Terms

The change in the Ogden rate from 2.5% to -0.75% has caused some insurers to warn of imminent premium increases – but why might this be necessary?  The negative rate implies that if a lump sum were paid out now & invested, the claimant would see a negative return throughout their lifetime.  The difference in payment amounts can be exemplified as below from Ageas:

Age Gender Claim Size @ 2.5% Claim Size @ -0.75% Difference
20 M £5,000,000 £9,904,348 98%
47 M £8,500,000 £14,999,454 76%
27 F £6,500,000 £13,949,421 115%
30 F £12,000,000 £22,997,255 82%
10 M £10,000,000 £26,521,997 165%
70 M £1,100,000 £1,388,607 26%


How has it affected Insurers so far?

Ageas – £55,000,000 hit in the fourth quarter of 2016

Aviva – posted exceptional charge of £385,000,000

Direct Line – an impact of £230,000,000 on its full year results

You may find this useful when explaining why most premiums are on the up, especially when combined with the increased IPT!

Does this create an underinsurance issue?

Looking at the above chart, it poses the question of under insurance following the amendment.  For instance, if you were to discuss Employer’s Liability with a client, whose workforce demographic was that of a particularly young, male make up – is a £10,000,000 limit of indemnity enough?  As you see from above, a previous £5,000,000 claim under the ‘old’ rate, soon becomes a near £10,000,000 amount under the new.