Ogden Rate Changes Hitting Motor Insurance Hard
While drivers across the UK have noticed a steep rise in the cost of motor insurance due to the reduction of the Ogden Rate, it is taxi drivers and fleet managers that are arguably suffering the most. The reduction has triggered a rise in premiums that is squeezing the profit margins of some companies and owner-drivers, putting them at risk of going under. Read on to find out more about what these changes could mean to your business, and whether the Government is likely to change the reduction enforced earlier this year.
What is the Ogden Rate?
The Ogden Rate is a way of calculating how much a claimant should be paid in the event of a life-changing injury. It is applied to ensure that a claimant is neither over-compensated or under-compensated, applying a discount based on the return on investment that could be expected from interest by investing the lump sum.
What was the change?
As of the 20th March 2017, the Discount Rate changed from 2.5% to -0.75%. This change means that for every £1,000 awarded in a claim, the insurer will be expected to pay the claimant £1,007.50 – an additional £32.50 compared to the 2.5% rate. This change is significant, especially in large pay-outs.
Why does this affect the price of my insurance?
The insurance industry was aware that there was going to be a reduction in the rate, the first since 2001, but it had been expected the fall to be between 1.5 and 1 per cent. The larger drop in reality will cost the insurance industry millions of pounds, losses that have to be recouped through charging customers more for their insurance.
Soundbites from the Association of British Insurers (ABI)
- The average car insurance premium has gone up by 11% in the past year.
- Up to 36 million individual and business motor insurance policies could be affected by the change to the Ogden Rate.
- Businesses with high motor insurance costs such as road hauliers could be particularly affected.
- The change also affects personal injury awards settled under Public Products and Employers liability insurances.
- The current methodology used to calculate the Discount Rate is fundamentally flawed. The way the rate has been set does not reflect the investment advice typically given to claimants and how they typically invest their compensation.
Have there been any other changes affecting the price of Motor Insurance?
Yes, there has been an increase in insurance premium tax, which went up from 10% to 12% on 1 June.
Is it affecting any other industries?
Most definitely. The rise in personal injury payouts because of the rate change affects any company, organization or business that finds itself having to pay compensation, including an already financially troubled NHS, which is likely to see a £1bn hike in compensation bills. In fact, the change will affect Employers Liability, Public Liability and Products Liability Insurance as well as Private and Business Motor Insurance. It is also affecting the very core of the insurance industry:
- Admiral Group: Expecting an extra cost of £140m to £175m to settle all current claims, reducing profits by £70m to £100m. Shares in the company fell by 3pc.
- eSure: Expects £1m to be wiped from its profits this year. Shares in the company also fell by 3pc.
- Direct Line: Expects pre-tax profits to be reduced by between £215m and £230m. Shares in the company fell by 7pc.
Will the Government reverse its decision to reduce the Ogden rate?
The negative impact on businesses combined with a new system for calculating payouts proposed by the ABI will hopefully add pressure on the Government to change the reduction enforced earlier this year.
If you are worried about how the change to the Ogden Rate may impact your business, give us a call, we are more than happy to provide information on how to secure cost-effective motor insurance.