Personal Injury Discount Rate - Who pays?
You may have seen or read about the recently announced change in the Personal Injury Discount Rate, sometimes known as the Ogden rate. This has been reduced from 2.5% to -0.75% with effect from March 2017.
You might well ask what on earth is this and what is it got to do with me?
This discount rate has traditionally been applied to lump-sum payments made by insurance companies to claimants following injuries sustained in motor accidents or accidents suffered at work or on other’s premises. The idea behind it is that the claimant should not be overcompensated for their injuries, given that they are receiving a large lump sum and could receive future investment income on this money. It is a way therefore, of reducing the payment that the insurers make and shifting some of this future investment risk to the claimant.
As you will know, investment returns in recent years have been much lower and hence this reduction in the discount reflects the fact that the claimant’s will receive a much lower return on the invested lump sum. The fact that the rate has changed to a negative figure means that the insurers will have to “top up” their settlements.
It is difficult to know whether to feel sympathy for the insurance companies or not as it has been known for many years that the rate was going to be reduced and the insurers have largely failed to plan for this and are now complaining at the amount of extra reserving they are having to do to pay for this. Having said that, the cut was much more savage than anyone had expected.
Whilst the insurers could have been more proactive over the past decade in preparing for this change it is the policyholder who will eventually pay for this in terms of higher premiums. Not only will motor rates rise but any legal liability policies such as public liability or employers liability will also feel the heat. This, on top of the continued rise in insurance premium tax will mean that your insurance spend will be inevitably rising higher than the rate of inflation over the next few years.