The Ogden Discount Rate, commonly referred to as the ‘Personal Injury Discount Rate’, is used to calculate lump-sum awards for claims relating to personal injury. The rate was implemented to ensure that claimants are compensated adequately to enable financial security for their future care and loss of earnings.
Up until the 20th March 2017, the rate applicable was +2.5%. This rate was more beneficial to insurers as the higher it is, the less insurers have to pay out for personal injury claims. However, in 2017, the Ogden rate was reduced to -0.75%, which dramatically increased the claims settlement figures that insures would need to pay when life-changing injuries occur.
The Lord Chancellor announced earlier this year that the rate would be changed to -0.25% with effect from 5th August 2019. Nevertheless, due to the rate remaining negative, the insurance industry has continued to pay out millions of pounds more each year in claims. In order to fund this vast cost, premiums for motor and liability insurance must continue to increase.
Example of the Ogden Discount Rate
Previously, when the rate was +2.5%, a 35-year-old claimant who had suffered a life-changing injury which prevents them from returning to work could, for example, have been offered a lump-sum settlement from insurers of £7m. However, under the revised rate of -0.75%, the award under this example would increase to almost £15m.
Despite the rate recently being improved from -0.75% to -0.25%, as the figure is still negative, claims costs continue to be significantly increased. As the industry had predicted that the recent change would improve the rate far more than it did, insurers’ calculations for future claims payments were broadly incorrect. The consequence, for the time being, is that insurance premiums will continue to increase.
It is also essential that an adequate limit of indemnity is purchased under Public and Employers’ Liability insurance policies to ensure that sufficient cover is in place.