The Ogden rate change and how it affects you

The storm that whipped up a furore of activity this week, was the announcement from the Department of Justice that the Ogden rate wouldn’t rise as high as expected. The insurance industry as a whole was expecting the discount to rise from -0.75% up to between 0-1%.

The announcement on Monday (15^th July) however showed the rate raising to just -0.25%.

So what is the Ogden rate?

The figure is used alongside the Ogden tables, to help work out the size of lump sum payouts to victims following a catastrophic event. Whether this be a serious commercial accident, a road traffic incident or a life changing slip/trip/fall on a business premises.

The discount percentage, exists to account for any profit a claimant may make from investing a lump sum received in an insurance payout. The lower the percentage, the more the insurer has to pay, to make sure a claimant has sufficient funds to account for any future costs accrued, whether that be through loss of earnings or ongoing care required.

And how does it affect you and your policy?

In the commercial market, the biggest effect will likely come from Public and Employer Liability policies, and there will be two key issues:

1. Increase in premiums: with insurers being required to pay out more than anticipated in the event of a catastrophic event, the inevitable domino effect will be a potential increase in premiums. Some industries will likely be harder hit than others, but with higher payouts expected, businesses may need to increase their cover limits.
2. 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. However this is less likely to happen.

What are the risks?

With many insurers predicting a higher increase in the rate, cover limits for policies affected by this type of claim may be lower than necessary, should the worst happen. This means that if your business was involved in a catastrophic event, your insurance may not cover the full amount awarded to a claimant.

This puts you and your finances on the spot, to make up the difference. And with the figures often reaching well into the millions, this could have disastrous effects on a business.

What can you do to protect yourself?

Make sure you have sufficient cover limits.

Work closely with your broker to interrogate your cover, and make sure you have sufficient limits in case the worst does happen. With the highest claims awarded so far sitting north of £30m for the worst incidents, it’s imperative that you are properly protected. Claims that may previously have sat comfortably within your limits based on how insurers have been forecasting may now exceed them by a significant margin.

As an example, we’ll take the scenario of a 36 year old male with a good job who suffers an accident which leaves him as a paraplegic and unable to return to work. Based on the optimistic costings some insurers have been using, at a 1% discount rate the payout for this claimant may be around £9.8m to account for loss of earnings, care, legal costs and rehabilitation. Whereas with the lower -0.25% discount rate, the equivalent payout would rise to just over £13.1m. If your policy limit was £10m, you would have been fine based on previous costings, but with the lower than expected discount rate, you’d suddenly be liable for over £3m worth of the costs.

So check your cover limits, and work with your broker to top up your policy if necessary to account for this change.

And if you need more help in determining whether or not your insurance would stand up to this change, speak to our team. And we’ll undertake a confidential review of your existing insurance arrangements, and show you how we can make sure every base is covered.