How changes to the Ogden discount rate could affect your business
The entire insurance industry was rocked back in February when the government unveiled plans to slash the Ogden discount rate, which is used to calculate compensation awards for personal injuries. The changes were enforced just a month later on the 20th of March, and saw the rate reduced from 2.5% to -0.75%.
What exactly is the Ogden discount rate?
When a compensation lump sum is paid to a claimant for personal injury, the sum awarded is reduced slightly based on the additional money the recipient could make if they decided to invest it. This formula is based in gilt yields, which is the rate of return on government bonds, specifically. As the returns for those bonds were negative, the Ministry of Justice decided to reduce the Ogden rate, which had been the same since 2001.
The move was met with widespread criticism by insurers across all sectors, who have lobbied for the new rate to be revised ever since. This comes as no surprise, seeing as in June 2017; figures from EY cited by Intelligent Insurer estimated the overall cost of the Ogden rate change at a huge £3.5bn across all business lines.
Huw Evans, director general of the Association of British Insurers (ABI), hailed the rate decrease “reckless in the extreme.” He estimated that up to 36 million individual and business car insurance policies would be impacted to overcompensate for just several thousand claimants a year.
The government backtracks
It was certainly an unpromising time for the sector; however September 2017 brought some welcome news, with the government agreeing to consult on amending the system.
As an Insurance Post article reports, draft legislation proposes that the rate is no longer tied to index-linked gilts but rather, is set on the assumption that claimants will be investing their payouts in a portfolio involving more than a low level of risk. The new 0% to 1% rate could bring greater stability to the market and help insurers recoup some of the profits they have undoubtedly lost since the change.
What does it mean for businesses?
As a business owner, the government’s u-turn on the so-called ‘discount rate scandal’ could impact you in a number of ways. Let’s explore some of them:
As Huw Evans predicted, insurers looked to offset some of their losses by increasing premiums for drivers. The discount rate, together with the rise in insurance premium tax, were blamed for the cost of UK car insurance leaping 11% to reach a record high back in July.
However, now the tables have now turned. The most recent Car insurance price index from Confused.com reveals that comprehensive car insurance premiums fell by 1.1% during Q3, or £9. This is the largest quarterly reduction seen in over three years; and it is hoped that the Ogden rate change will stabilise the market further and prevent premiums from climbing at the unprecedented rate they were before.
So, if you insure cars for your business or operate a fleet, you are likely to be rewarded with lower insurance costs. This will particularly significant if vehicles are a vital part of your modus operandi, for instance, if you run a taxi firm or delivery-oriented business.
As well as motor insurance prices, the Ogden discount rate impacted reinsurance prices for liability cover, increasing commercial rates for businesses.
All UK companies are required to have employers’ liability insurance to a value of at least £5 million from an authorised insurer, with many taking out additional cover to safeguard against a wider range of circumstances. With the rate rising again, you may see a slight reduction in your premium upon renewal.
Stride offers bespoke commercial insurance policies to businesses of all types and sizes. If you want to find out more about how our quality cover could benefit your business, get in touch today.