The Lord Chancellor has changed the (Ogden) personal injury discount rate for England and Wales to minus 0.25% from minus 0.75% but the decision disappointed Insurers who were expecting a bolder move.
The Ogden discount rate determines how much compensation insurers should pay to accident victims who have suffered life-changing injuries, covering expected future loss of earnings and care costs. The discount rate reflects the return that personal injury claimants can typically expect to receive when they invest their compensation. A lower rate leads to higher insurance compensation. Insurers were hoping that the revision would set the new rate in the positive territory between 0.5% and 1%.
“There are fears among Insurers of ‘overcompensation’ in claims which feature future damages/loss awards if a negative discount rate is applied,” says Tom Maughan, Claims Executive/Vice President at Lockton.
The Association of British Insurers (ABI) commented that “a negative rate maintains the fiction that a claimant and their representatives will knowingly choose to invest their damages in a way that would guarantee losing them money.”
The latest rate decision from the 15th of July follows a review by the UK government to explore how the rate should be set in the future. This process was triggered by a 27th of July 2017 decision by the then Lord Chancellor which reduced the discount rate drastically from 2.5% to minus 0.75%. The move took the industry by surprise and required UK Insurers who have exposure to catastrophic personal injury claims to significantly increase reserves, impacting their financial results.
The new rate of minus 0.25% will apply from the 5th of August 2019 and will require Insurers that have booked motor and liability reserves at a higher rate to strengthen their reserves.
“The positive aspect of the new rate is that it delivers certainty when resolving claims, given that the next review of the rate by the expert panel advising the Lord Chancellor will be within 5 years,” Maughan notes.
