OGDEN Rate

OGDEN Rate : All you need to know

Ashish Chaturvedi
Latest posts by Ashish Chaturvedi (see all)

What is it:

In the UK insurance market, insurers are required to indemnify anyone who is injured in an accident and suffers very serious life-changing injuries, to the extent of all future costs that the injured party will have to bear to sustain life in the same financial position as he enjoyed before the accident. Courts in England and Wales generally pronounce the verdict on the quantum for such losses. Any industry where a liability risk for personal injury is present needs to be aware of this law. To calculate the award for such injuries, the courts generally have a formula which considers several factors like the age of the injured party, current occupation, earning capacity and several other factors.

See also  Importance of Reinsurance Cover (Statistical Evidence)

This award must be paid in a lump sum to the injured party, therefore, it is obvious that there is an interest that will be earned on the amount over a period. Since the principle of insurance indemnity must ensure that no party gains from insurance claims, there is a discount rate applied to arrive at the quantum of the loss. Actuarial science defines this as Present Value of future loss and uses the discount rate factor. Higher the rate, lower is the payout. Depending on the discount rate used (Ogden rate in UK liability insurance), the liability insurance may or may not be enough to cover the verdict

What changed:

2001, up until 2017, this rate, at +2.5% was unchanged. However, Lord Chancellor changed the rate drastically and brought it to -0.75%. This means that all insurance liability payout for such injuries are going to cost the insurers starkly more than what they used to, because of the drastic reduction in the discount rate.

Why:

Governments carry out a review of how the lump sum payment for severe personal injuries should be affected. Since the rate influences the payout to the injured party, along with other factors like wage loss, impact to future earning capacity, etc., the government decided in Feb 2017 that it was time to make the change, though the magnitude of the change would be so drastic wasn’t expected by insurers. It was a rude awakening to the industry which had to go scrambling to figure out the impact since it was made effective immediately without any prior consultations with the industry stakeholders

See also  ASP.NET Core: The MVC Request Life Cycle

Implications:

The UK insurance industry wasn’t ready for such a big change in the discount rate. The change brought about several industries round tables and discussions to assess the impact. The board meeting was convened, and actuaries were asked to get down to number crunching to see the impact on their loss reserves. Since the loss reserves were going to be impacted hugely, the bottom line of insurers was hit and this prompted the insurers to raise the renewal rates accordingly, with some insurers raising the rates by as much as more than 10%. All this, in turn, nudged the lobbying body to pressurize the government to re-look at the drastic rate change.

A year later in 2018, the government bowed to the lobby pressure and to some extent also considering the capacity building that everyone hoped for, the rate was increased to -0.25%. Though this was a welcome rollback change, it wasn’t what the industry had hoped for, somewhere between +0.00% to +1.00%. The industry is still grappling with the impact and hoping that the lobbyists could bring another change in the mix of impending BREXIT changes.

References