The Ogden discount rate change, how will it affect motor premiums?

The Ogden discount rate change, how will it affect motor premiums?

Yesterday, Monday 6th March, the Ogden discount rate was reduced from 2.5% to -0.75%, which is one of the most significant changes facing our industry in some time and affects the financial settlements given to people seriously injured at the fault of others.

What is the Ogden discount rate?

It is a table of calculations used by the courts to assess and make sure that a seriously injured person has the necessary financial security to provide for medical care and future loss of earnings.

How does it work?

For example, Steve is 30 years old and badly injured in a car accident and is no longer able to work. At the time of the accident he was earning £25,000 a year. In addition to the loss of his future earnings, he will also need long-term nursing care which will cost £75,000 a year.

Steve’s claim for loss of earnings and nursing care against the party who injured him is successful. Insurers want to pay him a lump sum compensation settlement.

The lump sum will take into account a number of Steve’s personal circumstances. To get an accurate figure that Steve can invest so it will last for the rest of his life, his future financial requirements are calculated by applying a multiplier to the present day calculations of his financial needs.

A discount rate is then applied to allow for the interest that Steve will earn on his invested money over a period of time, currently 2.5%

Why has it changed?

The Lord Chancellor last set this rate in 2001 and 2.5% no longer reflects investment return so it has been lowered to -0.75%.

How will this affect motor premiums?

Steve’s lump sum payout under the old discount rate would have been £2,791,000, under the new rate the lump sum will be £6,325,000.

It is believed that there will be no option but for insurers to pass on the extra costs to clients and premiums are likely to increase.

Your Lark Account Handler will carefully review your motor renewal premium with you when it is due.

If you are not a Lark client and you are concerned with your premium increase please feel free to contact Suzi Rackley  for a quotation or further information,  on 01252 359060 or email suzi.rackley@larkinsurance.co.uk