Wednesday March 29, 2017
Despite the Odgen rate largely being billed as the ‘problem of the insurer’ in the press, it is the broker that will likely see the fall out when the customer is presented with a much higher price than usual for their cover. To minimise the pain of these difficult conversations, below is a guide to the where’s, why’s and what fors:
The rationale behind the rate…
Historically, damages for personal injury have been paid by way of a lump sum award. The object of the award was “to place the injured party as nearly as possible in the same financial position but for the accident”.
Damages for any future losses would be paid to the claimant at time of trial or agreed settlement. As the claimant would be receiving a lump sum “up front” the award would be discounted to allow for the net investment income that could be earned on the lump sum (the courts taking the view that the claimant’s investment should be “risk free”).
In 2001, The Lord Chancellor, who has the power to fix the discount rate, settled on a rate of 2.5% - based on a portfolio of 100% index-linked gilts (ILGs).
Fast forward a few years and the claimant fraternity has been arguing that the interest earned on ILGs was far less than 2.5% and, as such, the discount rate should be adjusted accordingly.
The counter argument has been that 1) Periodical Payment Orders (PPOs) are available and 2) with a large lump sum to invest, a mixed portfolio is what is chosen in reality by the claimant.
Following a review in 2017, the rate has now been set at -0.75%, resulting in widespread challenge and objection from the Insurance market and from within the government itself.
Importantly, the Chancellor has now agreed to revisit the framework and methodology used to set the discount rate in the future.
What this means: effect of the move from a 2.5% to -0.75% discount rate:
Any change to the discount rate results in an immediate change to the “multipliers” detailed in the Ogden tables (the tables which provide the correct multiplier used when calculating future losses).
Clearly a reduction in the discount rate increases the award, as per the following basic examples:
Example 1 - a 40 year old male sustaining an injury, resulting in him being unable to work again (pre-injury earnings of £20,000 p/a):
At a 2.5% discount rate the calculation is £20,000 x 18.09 (current Ogden multiplier) = £361,800
At -0.75% this becomes £20,000 x 26.52 (new Ogden multiplier) = £530,400
Example 2 - a 20 year old male sustaining a catastrophic injury, requiring care for the rest of his life (care costing £200,000 p/a):
At 2.5% the calculation is £200,000 x 32.10 (current Ogden multiplier) = £6,420,000
At -0.75% this becomes £200,000 x 88.96 (new Ogden multiplier) = £17,792,000
The claimant does still of course have the option of a PPO but that does seem to be a less attractive option with these changes.
Those worst affected are likely to be young or older drivers but there’s little doubt that most drivers will see a marked change when it comes to their renewal.