Government waters down Discount Rate change

UK insurers are claiming victory after the government agreed to revise its adjustment to the Odgen Rate.

In March it said it would adjust the Ogden Rate from 2.5 per cent to -0.75 per cent, a move which some said would cost the insurance industry £2bn, with motorists footing the bill in the form of a £75 increase in average premiums; for young drivers the increase rose to £250.

However, after lobbying from the insurance industry, the government has now announced that the Ogden Rate will be set using what it calls ‘low risk’ investments rather than ‘very low risk’ investments. As such, the interest rate is expected to rise to between zero per cent and one per cent, which would reduce the amount paid in compensation.

David Lidington, lord chancellor and justice secretary, said, ‘We want to introduce a new framework based on how claimants actually invest, as well as making sure the rate is reviewed fairly and regularly.’

The rate will be reviewed every three years, under this new proposal.

Huw Evans, director general of the ABI said, ‘This is a welcome reform proposal to deliver a personal injury discount rate that is fairer for claimants, customers and taxpayers alike. The reforms would see the discount rate better reflect how claimants actually invest their compensation in reality and will provide a sound basis for setting the rate in the future. If implemented it will help relieve some of the cost pressures on motor and liability insurance in a way that can only benefit customers.’

However, not everyone welcomed the news, with some seeing it as government climbdown in the face of pressure from the insurance industry.

Brett Dixon, president of the Association of Personal Injury Lawyers (APIL) said, ‘The discount rate must be set to meet the needs of catastrophically injured people. Someone with a life-long, life-changing injury such as brain damage or a spinal injury cannot afford to take any risks with how his compensation is invested.

‘He needs the money to keep a roof over his head, to fund his equipment, and to feed and clothe him and pay for his care for the rest of his life. We need to examine the detail of the Ministry of Justice’s response, but what I can say is that the new formula for calculating the rate will be critical to injured people.

‘The last thing people with devastating injuries think about when they are lying in hospital is their insurance premiums. They think about how they are going to manage. Insurers say an increased discount rate will ‘benefit’ customers through their premiums. It is of no benefit if they are severely injured and forced to take risks with the compensation they so desperately need.’