The Ogden discount rate is a calculation used to determine
how much money insurance companies should pay as compensation to people who
have suffered life-changing injuries so that it will cover all their predicted
future expenses including loss of income and care costs. However, because it is
paid in a lump sum which will be invested when it is received, the amount is
adjusted to account for the interest they would expect to earn in order to
ensure that claimants are not under or over compensated. This is where the
discount rate comes in.
How Does It Work?
To calculate how much would be needed over the claimant’s
likely lifetime, a multiplier is applied to the claimant’s financial needs which
would include loss of earnings and the cost of the care required. This
multiplier takes into account factors such as age, gender, and mortality risks
in order to arrive at a figure.
In order to work out how much to deduct to account for
interest on the sum provided, the insurer uses the discount rate.
The Odgen Tables list the multipliers which apply at each
various discount rate. The lower the discount rate, the higher the claim
settlement is likely to be.
What Are
The Changes?
With effect from 5 August 2019 the Ogden discount rate will
be increased from -0.75% to -0.25%, reducing the amount insurers will have to
pay to accident claimants. This will then be reviewed within a five-year
period.
The Ministry of Justice illustrated the effects of the
change for a 30-year-old male with annual financial costs of £50,000. Under the
existing rate of -0.75%, he would be awarded £2,935,500. Under the new rate
(-0.25%), he would be awarded £2,565,250 - a reduction of £370,250.
What does
this mean for policy holders?
In theory, decreasing the Ogden rate should result in lower
premiums on certain policies for customers. Whilst this could be the case, it
is unlikely due to how small the change is which means the difference is
insignificant to insurers when they are making decisions surrounding premiums.
If you would like any
further information regarding the matter, please call 01789 766888.