A change to the rate at which personal injury compensation is calculated (the ‘Ogden rate’) has become major news across the insurance industry. Here we explain how the changes will affect both injury claimants, and holders of motor and liability insurance policies.
When someone is seriously or fatally injured and a claim for compensation follows, the amount that is awarded as a pay-out is made up of various elements. These elements include compensation for pain and suffering; future loss of earnings; future cost of care; legal and professional fees and other financial support.
Such other financial support may be, for example, to cover activities that can no longer be undertaken due to the injuries or loss, such as driving or caring for dependents. It could also be to cover the cost of things like prosthetics or other forms of additional support required as a result of the injuries sustained.
How is Personal Injury Compensation Calculated?
The courts, when making an assessment for future loss of earnings, follow a set calculation method, making use of something called the ‘Ogden tables’. This involves taking the amount of money they believe the injured party will lose each year, and multiplying it by certain factors. These factors will include their current age and their projected life expectancy. The courts will also consider similar factors when working out how much may be required to cover the future cost of care, where applicable.
When injuries are serious or fatal, the amounts for loss of earnings and future costs of care can be quite high. In most cases, the pay-out is made in a lump sum, which the injured party can invest in order to earn interest over a period of time.
This opportunity to earn interest on the lump sum is taken into consideration by the courts. They apply a discount on the overall settlement, based on the amount of interest the claimant has the potential to earn over that period in order to make up their full award total. This adjustment that the courts make is known as the ‘discount rate’, which is linked to returns on low risk investments such as Index-Linked Gilts.
The discount rate, commonly known as the ‘Ogden rate’ and sometimes referred to as the ‘personal injury discount rate’, is something that has recently been subject to changes, the effects of which will extend to holders of motor and liability insurance policies. How these effects will come into play is what we will attempt to explain in this post.
What is the Ogden Rate?
The Ogden rate is used in UK court cases to make calculating future losses more straightforward in cases where injuries have been life changing or fatal. The rate is set by the Lord Chancellor under section 1 of the Damages Act 1996.
Since 2001, the Ogden rate has been set at 2.5 per cent. This means that for every £1,000 awarded in compensation by the courts, the insurer will make a pay-out of £975. This is based on the expectation that the injured party would earn 2.5 per cent interest per year which would lead to them eventually earning the full payment due which in the example case would be £1,000.
How is the Ogden Rate Changing?
The Ministry of Justice announced that as of 20th March 2017, the Ogden rate has been set at minus 0.75 per cent. Using the same calculation example as before, this would mean that for every £1,000 awarded in compensation, the insurer will be expected to pay the claimant £1,007.50: some £32.50 more per £1,000.
The new rate will apply to all personal injury damages awarded on or after 20th March 2017 in England and Wales. This will include all existing and future claims.
Why has the Ogden Rate Changed?
The rate has been under scrutiny for some time because the level of interest rates over the past few years has fallen significantly, meaning that claimants may have been losing out by not receiving the full amount of compensation awarded. In other words, their lump sum pay-out has not been netting them the return in interest that it was supposed to.
The change was originally expected to see the rate fall to between 1 and 1.5 per cent. The sharp drop to minus 0.75 per cent was certainly not widely expected.
What Effect will the Ogden Rate Change Have?
Whilst the change in the Ogden rate will of course herald good news for those claiming compensation following serious injuries or the loss of a loved one in a fatal accident, the additional payments that will need to be made by insurers will have to come from somewhere.
The impact of the newly introduced rate will vary from claim to claim, with the most severe injuries and longer timespans over which loss of earnings and care costs are required signalling the most significant effects.
AXA, one of the largest and longest standing insurance companies in the world, has provided some quite startling illustrated examples of how the Ogden rate change will affect the levels of compensation payable. They have said that a 30-year old plasterer with a traumatic brain injury would previously have been paid out £2.24 million by an insurer would now expect to receive £6.14 million. And an 18 year-old male claimant with a spinal cord injury who would previously have received a settlement of £7.6 million would now see that settlement rise to £19.3 million. These figures really do bring home the extent of the effects of the rate change.
In a nutshell, it means that the cost of a personal injury compensation claim will increase. According to the Association of British Insurers (ABI), up to 36 million business and individual motor insurance policies are likely to be affected by the reduction in the Ogden rate. Insurers will as a result need to find a way to ensure they are able to meet the awards made by the courts.
Will Insurance Premiums Rise as a Result of the Ogden Rate Change?
With the overall cost for the insurance industry estimated to be in the region of £7 billion, it is largely expected that the new Ogden rate will push up the cost of business and private motor insurance; public liability; employer’s liability and products liability premiums. The scale of the change is clearly something that cannot be absorbed by insurers on an ongoing basis, so we will have to resign ourselves to the fact that insurance premiums will rise as a result.
At Robert Gerrard we hold very strong and longstanding relationships with some of the most renowned and highly rated insurers, and you can rest assured that we will be doing our level best to negotiate on our customers’ behalf to ensure the very best value for money continues to be enjoyed across all types of policy.
If you have any concerns or queries concerning the Ogden rate, you are welcome to get in touch.