The government are set to announce reforms to the personal injury compensation pay out process.
Today (March 20th), these new calculations will be put into effect, according to an announcement from the Ministry of Justice. They intend to cut the discount rate – also known as the Ogden Rate – used to determine lump sum compensation.
The question is what impact will this have on insurance premium prices? And who will benefit from these changes? And who will bear the brunt of these changes more, the insurer or the consumer?
The Ogden Rate
The Ogden rate is a formula used by lawyers to calculate the future financial losses of someone involved in a personal injury claim or even a fatal accident, and work out how much compensation they are legally entitled to.
The idea is that if an individual is awarded a lump sum, that money can be invested and earn interest for the future. Therefore, the amount of compensation awarded will be adjusted according to the predicted interest.
Currently, the discount rate stands at 2.5%
For example, if you were awarded £1,000 in court, the amount you will receive will be £975 on that basis that if you were to invest that money for 1 year it would accrue 2.5% interest, or £25.
The 2.5% rate was set all the way back in 2001, calculated according to the Index Linked Gilts, government gilts seen as a safe investment. However, interest rates since 2001 have been falling, and it is now nigh on impossible to see returns of 2.5% on your investment, even on the Index Linked Gilts. Yet in spite of this, the discount rate has remained the same.
The New Rate
Liz Truss, the Lord Chancellor, announced on February 27th that as of March 20th, the new discount rate would be -0.75%.
Now, if you are awarded £1,000 compensation, you will be given £1,007.50, a £32.50 increase of the previous amount.
This is good news for all those victims of accidents, who will not be awarded an appropriate amount of money. There is also potential for previous claimants to have their compensation amounts increased according to the new rate, as they were technically undercompensated.
However, the worry is where will all this extra compensation money come from?
The UK’s leading insurance companies have come together to dispute the change, arguing that the cost of these increased claims will inevitably be passed onto the consumer by way of higher insurance premiums. Not the mention the added pressure it will put on an already strained NHS, which could end up having to find upwards of £1billion to settle these claims.
The ABI (Association of British Insurers) have launched an appeal already, and it seems that the Lord Chancellor is listening following the release of a joint statement:
“The government will progress urgently with a consultation on the framework for setting future rates, and bring forward any necessary legislation at an early stage…. The industry will contribute fully to the upcoming consultation, and the government will carefully consider all evidence and arguments submitted”
We will keep you updated with any developments.