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A Change to the Ogden Discount Rate: How to Mitigate the Premium Increases Ahead

In February 2017, the Lord Chancellor announced a significant reduction to the Ogden Discount Rate of 2.5%, to the revised level of -0.75%, causing UK insurer shares’ to plummet and sparking reaction from the insurance industry – who was expecting the rate to fall to around 1.5%.

 

So, what is the Ogden discount rate?

  • It is a calculation used by the courts to determine how much insurance companies should pay out to customers in cases of life-changing injury
  • When victims of life-changing injuries accept lump sum compensation payments, the actual amount they receive is adjusted according to the interest they can expect to earn by investing it
  • The Discount Rate is linked, by law, to returns on the lowest risk investments – typically index-linked gilts. The yield on these gilts, or Government bonds, has fallen dramatically since 2001

 

The reduction means that those suffering from serious injuries will receive significantly higher compensation payments than before. Mike Mitchell, Group Broking Manager at TL Dallas observes, “this change has caused insurers to revisit their reserves for existing claims to ensure they have sufficient funding set aside to meet future liabilities; Aviva has announced that this change has increased its Combined Operating Ratio from 94.9% to 106.3%, QBE has announced that it is setting aside an additional $160m in reserves.”

The effects of this will be that insurance that covers bodily injury – principally Motor, Employers’ Liability  and Public Liability – will need to be re-priced to ensure the premiums generate adequate funds. Furthermore, some insurers may well choose not to underwrite these classes of business, so there may also be a contraction in the market supply. The net effect is that premiums will inevitably go up and insurers will become more selective.

Gary Foggo, Health & Safety Consultant at TL Dallas, commented, “now is the time for companies to proactively review their risk management procedures, as well as risk transfer solutions and claims defensibility.”

To combat price increases, businesses will need to demonstrate and evidence how well they manage their risks to ensure they are ‘top of the underwriter’s pile’ come renewal. Firms with resilient and demonstrable health and safety procedures (which drive attitude, behaviours and culture) will be in a stronger position to lessen the knock-on effects.

The first step to controlling risk in the workplace is hazard identification. Thereafter, it is down to control measure implementation and the effective documentation of both. He adds, “it is impossible to eliminate all risks and prevent every accident, but when an accident does occur it is vital a company has the resources available to minimise the effect; that processes are robust; and that documentation is available to defend the claims.”

As part of the process of risk management, businesses should also be considering risk transfer: working with their broker to explore whether their limits of cover and sums insured remain adequate, given the potential change in exposure as the revised Ogden Discount Rate takes effect.

What should you do?

Speak to your broking team. Companies should get support from a qualified risk management professional who will work with you and your broker to review your internal processes and advise on a relevant approach to ensure a safe workplace and proactively manage claims when they do occur.

If you would like to discuss this matter further, please contact our Health & Safety Consultant, Gary Foggo – gary.foggo@tldallas.com or call 0131 322 2641.