The new Ogden discount rate is proposed to be set between 0% and 1%, and will be reviewed every three years to ensure claimants receive fair compensation. The move will also allow insurers to pass on rate savings to customers, according to GlobalData Financial Services.
After personal injury insurers had pushed for a review of the discount rate, the Ministry of Justice has said the new rate will be set between 0% and 1%. The revision has been welcomed by the insurance industry after the rate was controversially changed from 2.5% to -0.75% in March 2017.
The new positive rate could be set under draft legislation that is to be laid before Parliament.
However, the new rate will not apply retrospectively, and the new framework for setting the rate in the future will only apply if the draft law is enacted.
Under the new proposed framework, the Ogden discount rate will be reviewed within 90 days of the enactment of new legislation and afterwards every three years, which will ensure it does not grow outdated.
It will also be set in review of a wider range of low-risk investments instead of purely index-linked gilts, making sure the rate is set realistically with how individuals invest.
Good news for insurers
This is good news for insurers, as it will mean rate changes are more predictable and manageable.
In their 2016 annual reports, insurers highlighted that profitability was affected because they had to revise their finances and increase reserves to acknowledge that future claims costs would rise.
The change is also a win for consumers. Personal injury claimants will have peace of mind that the amount of compensation they will receive is accurate.
Lower claims costs for insurers mean savings will also be passed on to consumers through lower premiums.
But the industry is still waiting on the implementation of the Civil Liability Bill, which was announced in June 2017 during the Queen’s Speech.
Fraudulent whiplash claims are continuing to drive up claims costs for motor insurers. Although a changed discount rate will allow insurers to deliver savings, the personal injury market will not see true reform until the Civil Liability Bill is also in force.