The Ogden discount rate is a calculation used to determine how much insurance companies should pay to people who have suffered life-changing injuries, in order to cover all their predicted future losses.
The settlement agreed needs to accurately reflect the claimant’s future loss of earnings, as well as covering any care costs.
However, because it is paid in a lump sum which will be invested when received, the amount is adjusted to account for the interest they would expect to earn. That’s where the discount rate comes in.
To work out how much would be needed over the claimant’s likely lifetime, a multiplier is applied to the claimant’s financial needs is based on age, gender, and mortality risks.
To work out how much to deduct to account for interest on the sum provided, the insurer uses the discount rate. The lower the discount rate, the higher the typical settlement.
The Lord Chancellor has slashed the rate to -0.75% from the +2.5%, where it has consistently been since 2001, taking effect from March 2017.
The new rate means the pay-out will be much higher and this significant change is expected to cost the insurance industry millions of pounds.
Motor insurance rates have already seen a dramatic increase, both business and personal as insurers look to compensate for future loses.
This could just be an initial “knee-jerk” reaction as the insurers just don’t know the long-term implications and rates could settle back down, however I suspect that won’t be anytime soon.
The insurance industry is attempting to appeal and get the rate reviewed, however there is no timescale yet announced.
The bad news is that for motorists you will see an immediate impact and with the wider implications I suspect that business insurance rates for non-motor policies will also start to rise.
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