Insurance prices could fall if proposed changes to the way personal injury claims are calculated get passed – however, this could mean victims get less compensation.
The so-called ‘Ogden rate’ is used to calculate the compensation insurers pay to people who suffer severe and long-term injuries.
If a claimant accepts a lump sum payment, the Ogden rate is used to adjust the lump sum to ensure the victim receives the correct amount after future losses, costs, and potential earnings from investing the money are considered.
Until 20 March 2017, the Ogden rate was 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.
However, the Ogden rate changed to -0.75% on 20 March 2017. In practice, this means insurers have had to pay out more – an extra 0.75% on top of a lump sum, rather than taking away 2.5% - good news for claimants. So, on the £1,000 loss calculated, the insurer is now expected to pay the claimant £1,007.50.
But this is bad news for consumers as it has added about £60 to motor insurance prices, according to price comparison website Comparethemarket, as insurers look to recoup costs.
What has the government proposed?
Following a consultation launched in February, the government has proposed basing the rate on victims investing the money in “low risk” rather than “very low risk” asset classes – meaning victims are likely to earn more from investing their lump sum.
A new Ogden rate has yet to be set, but the government says, “based on currently available information” if the new system were to be applied today, the rate “might” be in the region of 0% to 1%.
This means insurers may in future not have to pay out extra on top of the lump sum, meaning premiums could fall for motorists but victims would be paid less.
In addition, the government has proposed reviewing the Ogden rate more regularly in future – at least every three years – and creating an independent expert panel to be involved in the rate-setting process.
The Ministry of Justice says the changes are expected to come into force in “months rather than weeks”.
Lord chancellor and justice secretary, David Lidington, comments: “We want to introduce a new framework based on how claimants actually invest, as well as making sure the rate is reviewed fairly and regularly.”
Insurers welcome the change
Huw Evans, director general of the Association of British Insurers (ABI), says: “This is a welcome reform proposal to deliver a personal injury discount rate that is fairer for claimants, customers and taxpayers alike. The reforms would see the discount rate better reflect how claimants invest their compensation and will provide a sound basis for setting the rate in the future.
“If implemented it will help relieve some of the cost pressures on motor and liability insurance in a way that can only benefit customers.”
The British Insurance Brokers' Association (BIBA) also welcomes the announcement but calls on the changes to be implemented swiftly. Its executive director, Graeme Trudgill, comments: “The insurance industry was united in its approach to the government, and in its desire to achieve a fair balance of compensation for injured parties as well as reversing the unintended consequences of the change.
“BIBA now calls for a speedy timeframe for implementation of these proposals to end the uncertainty for customers brought about by the significant under insurance risk and increase to premiums that March’s discount rate change caused.”
Simon McCulloch, director at Comparethemarket.com, adds that the change is likely to drive down insurance premiums: “The proposals to change the way in which the discount rate is calculated is undoubtedly a positive step for the majority of British drivers.
“We estimate that the proposed changes, if set at 0.5%, would reduce the average premium by around £23, given the Ministry of Justice’s (MoJ) expectation that the rate will be set between 0% and 1%. We should bear in mind, however, that the original changes to the rate in February this year added around £60 to motor insurance costs, so drivers are still paying more than they were last year as a result of MoJ’s reforms.”