Reforming the Ogden rate

13 December 2017

After a dramatic change in the Ogden discount rate earlier this year, the government has since decided to revise it. We find out what impact the rate reform will have on the insurance industry.

Until earlier this year you probably wouldn’t have been aware of the Ogden discount rate, unless you were involved in settling major injury claims or were in an accident that seriously affected your quality of life.

However, in March 2017, the government changed the rate from 2.5 per cent to minus 0.75 per cent, resulting in alarming headlines that increased its profile considerably:

“Ogden hits Aviva UK COR as it rises to 106.3 per cent” Insurance Age (9 March 2017). “Personal injury rule change wipes £217 million off Direct Line Profits” The Telegraph (7 March 2017).

“QBE to be forced to hike UK prices after changes” The Australian (28 February 2017).

Sudden change to Ogden discount rate

The Ogden rate is the discount that is applied to large personal injury claims, which recognises that the claimant can invest the payment and receive a return on it.

The discount rate reflects the expected rate of return on the investment of the lump sum – and this hadn’t changed since 2001.

Insurers’ financial results were turned on their head and there was immediate pressure put on front-line underwriters to increase rates on any class of business that was exposed to personal injury losses.

Clients involved in higher risk occupations or that had large outstanding injury claims reserves were put under the spotlight and many clients were looking at immediate and significant increases in their premiums.

Was this the moment that was going to harden the whole UK commercial insurance market? It hasn’t yet, with the exception of the clients mentioned above.

The fact that insurers’ 2017 budgets/ rates were set before the severe rate changes meant that there wasn’t a cohesive response from the market; the aggressive pursuit of new business also limited the impact.

There was a feeling that perhaps there would be more of a response from insurers in 2018.

The government, however, has now decided that the rate of minus 0.75 per cent was a step too far and has agreed that something between 0 and 1 per cent is more appropriate (but want to undertake a consultation process in 2018 before settling on a figure).

There has been a positive response from insurers. Stephen Hester, Chief Executive at the RSA Group, comments: “We welcome the proposed reforms, which much better reflect the realities of how claimants invest their compensation payments today and provide a means to continue to review the situation over time.

“If passed, the benefits will be felt by all our customers, helping to stop the rot of steep rises in premiums, which are having a disproportionate impact on costs for motorists, businesses and the NHS.”

While positive, the news has created more uncertainty, which is illustrated in the following claims example recently provided by Eversheds:

A 30-year-old male with a lifetime future care claim of £50,000 per annum:

  • At the current discount rate of -0.75 per cent, his award for future care would be £3,571,500
  • At the new discount rate of 0.5 per cent his award for future care would be £2,434,000.

That is a difference of £1,137,500.

It’s a real challenge reserving for claims when such small percentages have such a significant impact on quantum.

Despite the fact that the Ogden discount rate is set to increase, insurers will still be pushing for higher rates in 2018 for certain exposed classes of business due to the fact that the rate will still be less than the 2.5 per cent it was at the beginning of 2017.

It is also fairly certain that claimants will be pushing for an early settlement of their cases before the revised discount rate becomes law.

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For further information, please contact Peter Keefe, Senior Partner on +44 (0)207 528 4585 or email