The Ogden Rate Change – What Does it Mean?
A review of how payments for accident victims are calculated has left the insurance industry reeling, with soaring motor premiums expected as a direct result. Our Managing Director, Bryan Banbury, looks at the impact on motor fleet owners.
Recently, the government made a much-anticipated announcement regarding the Ogden discount rate – moving from -0.75% to -0.25% on August 5th this year. However, the decision by the (now former) Lord Chancellor, the Rt Hon David Gauke MP, came as somewhat of a surprise to industry insiders.
The Ogden discount rate is incredibly important for both insurers and our customers. It essentially determines the discount that an insurer receives when paying out claims for life-changing injuries, with the pay-out being a lump sum expected to cover the claimant for their life-time. The discount rate demonstrates how much interest an insurer would be paying on this amount and is deducted from the total sum to be paid. The higher the Ogden rate, and so the assumed return, the lower the lump sum paid by the insurance companies has to be.
Over recent months, insurers had been given the nod that based on current stock market performance, the new, reviewed rate was expected to be between 0 and 1%. As such, insurers have been working to these figures for reserving and pricing decisions.
And so, like many in the market, I was blown away by last week’s decision. Yes, a rise has been granted and is certainly welcome (from 2017’s -0.75% to -0.25%), but it is significantly lower than expected. Implications can’t be taken lightly.
Many commentators have argued that as a result, claimants will remain overcompensated, undermining the common law principle of 100% compensation, and I agree.
Costs will almost certainly increase for business and motor fleet owners – with the insurers facing higher lump sum payments than expected, insurance companies will be forced to add costs to premiums rather than be able to save customers money, particularly reducing affordability for high risk customers such as road hauliers and commercial fleets. The expectation that the rate rise would reach 0 – 1% was so set in stone, or so the industry thought, that many insurers have been pricing motor insurance and settling claims at the higher rate. As a result, reserves must be adjusted accordingly, and costs made up for in motor premiums going forward.
Furthermore, uncertainty is already creeping into the sector, with the prospect of another rate change likely when reviewed within the next five-year review period. The unknown is unsettling. Confidence in the government’s ability to take a considered decision, is at an all-time low.
So, with motor premiums set to rise, what can be done to keep insurance costs to a minimum? One of the most important things is to work with a trusted broker. Insurance brokers, like Russell Scanlan allow you to get the best deal for your business. As an independent representative, brokers have access to a wide range of products which can be matched and tailored to individual needs, with the advantage of much greater value for money. Trusted relationships built up over many years, means brokers can provide a specialist service based on a deep level of knowledge and understanding of your requirements.
For more information on motor fleet insurance, contact Russell Scanlan on 0115 947 0032 or visit https://www.russellscanlan.com/contact/