The Ogden Discount Rate Changes Explained
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The Ogden Discount Rate Changes Explained

The Ogden discount rate is a calculation used to determine how much money insurance companies should pay as compensation to people who have suffered life-changing injuries so that it will cover all their predicted future expenses including loss of income and care costs. However, because it is paid in a lump sum which will be invested when it is received, the amount is adjusted to account for the interest they would expect to earn in order to ensure that claimants are not under or over compensated. This is where the discount rate comes in.

 

How Does It Work?

To calculate how much would be needed over the claimant’s likely lifetime, a multiplier is applied to the claimant’s financial needs which would include loss of earnings and the cost of the care required. This multiplier takes into account factors such as age, gender, and mortality risks in order to arrive at a figure.

In order to work out how much to deduct to account for interest on the sum provided, the insurer uses the discount rate.

The Odgen Tables list the multipliers which apply at each various discount rate. The lower the discount rate, the higher the claim settlement is likely to be.

 

What Are The Changes?

With effect from 5 August 2019 the Ogden discount rate will be increased from -0.75% to -0.25%, reducing the amount insurers will have to pay to accident claimants. This will then be reviewed within a five-year period.

The Ministry of Justice illustrated the effects of the change for a 30-year-old male with annual financial costs of £50,000. Under the existing rate of -0.75%, he would be awarded £2,935,500. Under the new rate (-0.25%), he would be awarded £2,565,250 - a reduction of £370,250.

 

What does this mean for policy holders?

In theory, decreasing the Ogden rate should result in lower premiums on certain policies for customers. Whilst this could be the case, it is unlikely due to how small the change is which means the difference is insignificant to insurers when they are making decisions surrounding premiums.

If you would like any further information regarding the matter, please call 01789 766888.