UK insurers ‘hugely disappointed’ as Ogden discount rate set at minus 0.25%

UK insurers will be “hugely disappointed” as the injury damages rate, the Ogden discount rate, was set at minus 0.25 percent today to come into force on August 5, 2019.

As the first discount rate review under the new methodology provided for in the Civil Liability Act 2018, the new rate from the Lord Chancellor will save insurers money as it had previously been set at minus 0.75 percent in 2017. However, the sector had hoped for a much greater discount (IE a higher rate).

The Ogden rate is used to assess how much insurers should pay in compensation to people who have suffered life-changing injuries to cover predicted future losses. A discount rate is needed because compensation is paid in a lump sum, which is expected to be invested, so the payment is adjusted to account for the interest they would expect to earn on the lump sum. The higher the Ogden rate - in relation to a higher predicted investment return - the less insurers have to pay out.

Charles Ashmore, head of Catastrophic Injury at global legal business DWF, said: "The decision will be seen as hugely disappointing by insurers. While it may not be a complete surprise in light of developments in Scotland during the passage of the Damages (Investment Returns and Periodical Payments) (Scotland) Act 2019 where the predicted rate has been in the region of minus 0.25 percent, it will be considered to be at the very lowest end of expectations and at a level which many believe will still result in overcompensation to claimants.”

He said that a dual rate was apparently considered but ruled out at this stage due to insufficient evidence, “though it has not been ruled out in future and there will be further consultation” he added, saying that the next review is expected to take place within five years.

Kate Duffy, partner with global law firm Clyde & Co, said: “This news has wiped the smile off the face of the many insurance actuaries still celebrating England’s cricket win yesterday. Minus 0.25 percent is a poor result. Yes, it’s better than the proposed minus 0.75 percent, but it remains woefully inadequate. From the industry’s perspective, it tips the odds too much in favour of claimants at the expense of insurance-buying motorists and businesses, who will inevitably have to dig deeper for insurance costs.”

The Lloyd’s market was “very disappointed” by the review outcome, according to David Powell, head of non-marine underwriting at Lloyd's Market Association, who called the rate adjustment “marginal”.

He said that while the change is positive for compensators, “such a small movement that retains a negative rate is a severe disappointment and well below the level underwriters were expecting”.

“The new rate will sustain the vast majority of reserving costs that were imposed on the insurance industry when the rate was previously changed from plus 2.5 percent to minus 0.75 percent in 2017. The highly competitive nature of our industry means that reductions in costs will quickly influence premiums. However, this positive but small change is unlikely to lead to substantial price reductions for policyholders.”

Powell said the LMA was waiting for further information from the Lord Chancellor “so that we can understand the reasoning in more detail and the statutory Impact Assessment should make interesting reading”.

He said the market had speculated that the Government Actuary had "given a very negative view on the wider economic factors" that are assessed as part of the new rate-setting mechanism. Powell also noted that the Lord Chancellor’s statement made reference to a future consultation on setting a dual rate, which he said the LMA had long advocated. "We will await this consultation with interest, as this route may be the only prospect in the short-term that could provide some relief to motor and casualty insurance customers now facing sustained pressure on premiums.”

General Insurance leader and partner at PwC Mohammad Khan said the insurance industry will broadly welcome the announcement from the Lord Chancellor, David Gauke.

"Ever since the announcement from government to review the discount rate back in September 2017, the insurance industry expected the Ogden discount rate to increase from minus 0.75 percent and has consequently been pricing motor insurance and settling insurance claims at a rate higher than minus 0.75 percent - typically between 0 percent and 1 percent.

"In real terms, this means that UK motorists have been paying lower insurance premiums compared to what the industry could have charged them if they assumed the Ogden discount rate was minus 0.75 percent.

"The announcement today means that motor insurance premiums - which have been broadly stable this year and slightly lower than last year - will probably increase. The average motor insurance premium will probably increase by between £15 and £25 but younger drivers may see their premiums increase by about £50 to £75."

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