The Lord Chancellor has announced a shake up of how damages are calculated for those seriously injured in accidents, but the insurance industry has stated the changes don’t go far enough to protect their businesses and would end up costing consumers more.
This morning (July 15), MP David Gauke, Lord Chancellor and Justice minister (pictured), said the industry-wide Ogden discount rate would rise to -0.25 per cent — up from the -0.75 per cent set since 2017.
The discount rate is used to assess how much accident victims will need in compensation over their likely lifetime and it affects how much insurers have to pay out.
The rate corresponds to the expected investment return of the lump sum paid out by insurers.
The higher the Ogden rate, the less insurers will have to pay out as a higher rate matches a higher hypothetical return from the lump sum were it to be invested instead.
Therefore a shift from -0.75 to -0.25 is a move in the right direction for insurers (and bad news for accident victims), but not as big of a shift as expected or wanted by the sector.
The rate is often used to calculate large payouts for insurers — as the fund often supports accident victims for life — so minor changes can have a big impact.
For example, in 2017 LV put its plummeting profits down to a previous change in the Ogden rate from 2.5 per cent to -0.75 per cent.
The industry had expected a bigger change which would have seen the rate enter the positive space.
Huw Evans, director general of the Association of British Insurers, said today's announcement was a bad outcome for insurance customers and taxpayers that would add costs rather than save customers money.
He added: "A negative rate maintains the fiction that a claimant and their representatives will knowingly choose to invest their damages in a way that would guarantee losing them money.
"This will remain the lowest discount rate in the Western world, leaving England and Wales an international outlier at a time when we need to boost our attraction to international capital."
David Nichols, Zurich’s chief claims officer, said: "Despite a lengthy engagement with the insurance sector on how to achieve a balanced rate, we are greatly disappointed with today’s announcement of a -0.25 per cent rate.
"It’s essential that claimants get the compensation they are entitled to following an injury.
"However, the government’s failure to change the discount rate to a balanced level will only serve to increase the cost and, therefore, affordability of certain types of insurance."
Mr Nichols added the rate was likely to reduce both market coverage and affordability for higher risk customers as well as have a financial impact on public liability cover for the public sector and businesses.
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