Changes to the Ogden Discount Rate – What Do They Mean?
You may have seen coverage in the news recently reporting changes to the Ogden Discount Rate. At Rollinson Smith Insurance Brokers, we want to explain exactly what this means and how the change might affect your insurance.
What is the Ogden discount rate?
When insurance companies calculate how much they should pay out to people who have suffered life-changing injuries, they must arrive at an amount which reflects the claimant’s future loss of earnings and cover all their future care costs.
The Ogden discount rate is used to adjust the settlement awarded based on the amount of income that the lump sum would expect to earn when it is invested.
How is it calculated?
Firstly, the insurer applies a multiplier to the claimant’s financial needs. The multiplier takes age, gender and mortality risks into account. This multiplier is determined by the discount rate, ensuring the final amount is adjusted to account for the total interest which the lump sum should earn over the claimant’s lifetime.
The Odgen Tables list the multipliers which apply at each discount rate, across a range of -2% to +3%. The lower the discount rate, the higher the typical settlement of a claim.
How is it changing?
The Lord Chancellor announced the discount rate would drop from +2.5% to -0.75%, taking effect from 20th March 2017.
This changes the corresponding multipliers, resulting in higher payouts for victims of life-changing injuries.
For example:
John is 30 years old and was seriously injured in a car accident. He will be unable to return to work, where he earned £25,000 net per annum and will need nursing care totalling £75,000 annually.
A multiplier is applied to these figures to calculate how much John will need for the likely duration of his life, minus therate of investment return the lump sum should earn.
At a discount rate of 2.5%, total damages for this claim amount to £2,791,000. At the new rate of -0.75%, the settlement value changes to £6,325,000 – an increase of £3,534,000.
What does the change mean for you?
Insurers are beginning to raise general insurance premiums to cover the additional costs of these increased payouts. Personal and commercial motor insurance premiums are likely to be most affected, with insurance providers still announcing their plans.
As your insurance broker, Rollinson Smith Insurance Brokers is committed to searching national insurance providers to find the most competitive cover at every renewal.
If you have any queries or concerns, you can contact your Rollinson Smith Insurance Brokers adviser on 01952 607600 or email info@rollinsonsmith.co.uk
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