03 Apr 2017
The Discount Rate
In February, the Ministry of Justice amended how insurance companies calculated the compensation paid to injured parties. Last assessed in 2001, when interest rates were higher, pressure has been building on the government to adjust this.
In determining lump sum compensation, factors such as the future cost of care and loss of future income are taken into account. Crucially the interest rate they can expect to receive from investing it is also factored in. This interest rate, replicated as a discount rate is known as the Ogden Rate and prior to the amendment was 2.5%.
As an example:
For a £100 claim, the claimant would expect to receive £97.5 based on the 2.5% discount rate. However, with inflation outstripping interest rates, the Lord Chancellor viewed 2.5% as putting claimants at a financial disadvantage. Therefore, with effect from 20 th March, the rate was amended to -0.75%.
Referring back to our example the claimant will now expect to receive £100.75.
Whilst this example is small, you can clearly see the impact if you apply multiples for which typically liability claims are. To put it into perspective Aviva has written off nearly £400 million of its annual profits to account for this rate change. Insurers are dismayed by this dramatic rate change, having expected to change to approximately 1.5%.
Building insurance factors in an element of liability cover through Property Owners and Employer’s Liability cover. Therefore, based on this and the overall reduction in profitability we expect to see insurers applying increased pressure for higher premiums over the forthcoming year, citing the ‘Ogden Rate’.
Insurers are fighting this and lobbying for the government to review this, however, in the meantime we will of course be reviewing all quotations and negotiating accordingly.