On 15 July 2019, the Ministry of Justice announced changes to the Ogden rate. An increase in the rate from -0.75% to -0.25% fell short of insurers’ expectations who were hoping for a much greater discount, prompting warnings that premiums may rise as a result. The new rate will come into use on 5 August 2019.

Insurers have argued that this is inadequate and will breach the principle of 100% insurance, as it will result in over-compensated claimants.

Shares in some UK motor insurers fell after the change was announced.

What is the Ogden rate?

Set by the UK government, the Ogden rate is used with the Ogden tables to help to work out the size of the lump sum payouts to complex Personal Injury Liability claims.

When considering elements of a claim, some may require ongoing payments over a number of years to cover future losses, for example, for long-term care costs or lost income costs. Insurers are required to set aside a large lump sum to meet these costs over the anticipated period during which the victim might need support.

The Ogden rate is a fixed rate that insurers use to assume the level of investment growth of the fund and therefore exists to account for any profit that may be made from investing a lump sum received in an insurance payout. If the percentage is higher, the insurers can put less money in the fund. But when the percentage is lower, the insurer must invest a higher amount up front.

In the commercial market, there will be two key results:

  • increase in premiums – with insurers being required to pay out more than anticipated in the event of a serious accident, the inevitable effect will be a potential increase in premiums; and
  • difficulty in getting cover – for industries at particularly high risk, the capacity to insure these risks in the market may decrease, making it harder to get cover. This is less common.

The Ogden rate was previously set at 2.5%, until 2017 when it dropped to -0.75% which had a huge economic impact on insurers. The new rate, although higher at -0.25%, is not what insurers had anticipated and therefore will require insurers to pay higher up front lump sums than what they had prepared for.