You may well have seen in the media when it was announced on Monday that the Ogden discount rate has been reduced from 2.5% to -0.75%, and the change will take effect from 20 March 2017.
This is one of the most significant changes facing the insurance industry in some time and will undoubtedly have a substantial impact. We have produced this Newsletter in conjunction with Allianz Insurance plc to explain the impact of the change.
What is the discount rate?
The objective is to make sure a severely injured person has the necessary financial security to provide for their care and loss of earnings. The discount rate is used to calculate the amount of compensation they receive to reflect the return they will earn when that money is invested.
Please see this illustration for an example of how the discount rate is used to calculate compensation payments and the way in which this change will impact the insurance industry.
Impact of the change
The reduction means that those suffering from serious injuries will receive significantly higher compensation payments than before.
The substantial increase affects claims costs for all lines of business which see claims for bodily injury - including Private and Commercial Motor, Motor Trade, Casualty (Employers Liability, Other Liability and Contractors Liability) and SME. As such, Insurers are having to immediately consider their pricing requirements in this new environment. This will be an unwelcome change for insurers, brokers and customers alike but one that cannot be ignored.
Jon Dye, CEO of Allianz Insurance plc said of the change:
'The new rate announced by the Lord Chancellor is extremely disappointing. We believe that the system used to calculate the discount rate is flawed and does not take into account the current investment environment and the financial choices available for claimants.
But now that the decision has been made we must move forward and work through the consequences. Internally, we have scenario tested a range of possibilities and now that we know what the new rate is, we can start to make decisions on what the best course of action is to provide sustainable solutions for our business, partners and customers.
When situations like this present themselves, we are fortunate to be part of a group which is financially strong and capable of dealing with the unexpected.'
Find out more
For more information on how the discount rate change is used to calculate compensation payments and to see the role it plays in context, please see this illustration. If you've got any questions about the discount rate change please contact your Account Executive or email us on email@example.com