The long awaited reforms to the 'Ogden Discount Rate’ have now been announced by the Government. The rate is used by courts in England and Wales to determine how much critically injured victims receive in compensation. The idea is that a victim facing future loss of earnings, as well as the costs of future care should be compensated to the same position financially as they would have been had they not been injured in the first place.
In serious injury cases, claimants will usually receive their compensation as a lump sum and invest it. As such they can expect to receive a rate of return over the remainder of their lives. This is where the Ogden Discount Rate comes in.
The rating is used by courts to calculate how much compensation is owed to victims. Any “up front” compensation award will have the Ogden Discount Rate applied effectively reducing or increasing the award to reflect any loss, or profit an insurance claimant might expect to make on their investment over the course of a lifetime so that they are neither under nor over-compensated. It is based on an assumption that a claimant will pick a low risk investment and traditionally, it assumed that claimants will invest in Government bonds.
The rate was set in 2001 at 2.5%, which assumed that insurance claimants would earn a 2.5% return on investment over the course of their lifetime on a lump sum settlement . However, in March 2017 the then Lord Chancellor, Liz Truss, unexpectedly slashed the rate from 2.5% to minus 0.75%. This caused a major headache for Liability and Motor Insurers whose premium calculations were thrown into chaos at the prospect of much larger claim settlements.
The Lord Chancellor reasoned that very low risk investments such as gilts were no longer providing returns sufficient enough to justify the 2.5%rate. Insurers accepted the need to reduce the rate in 2017, but did not anticipate a negative figure.
After review, the current Lord Chancellor, David Gauke, has now reset the rate at minus 0.25%, up from minus 0.75%. Whilst this mean that critically injured people will now receive smaller lump sum payouts from insurers, insurers were expecting the new rate to be set at a rise of between 0 and 1%, not minus 0.25% and this will likely impact upon Liability and Motor Insurance premiums.
Huw Evans, director general of the Association of British Insurers, said: 'This is a bad outcome for insurance customers and taxpayers that will add costs rather than save customers money'.
'A negative rate maintains the fiction that a claimant and their representatives will knowingly choose to invest their damages in a way that would guarantee losing them money. This will remain the lowest discount rate in the Western world'.