The Ogden Rate change will cause a massive spike in Liability Insurance Claims and will see increased insurance premiums across a wide range of essential insurance products.

However, if you have never before heard of the Ogden Rate, you can be forgiven. This little heard of feature of Liability Insurance Claims Management, set by the UK Government, was only of particular interest to Insurers and their actuarial staff. The Ogden rate is used when calculating the amount of money needed to pay for complex Personal Injury Liability claims.  However, following pressure from Claimant representative groups who felt Insurers were not making adequate provisions for their clients, the UK Government changed the Ogden rate in February 2017 by 130% which is having an extraordinary affect on the size of Liability Insurance claims reserves set aside by Insurers and as a result insurance costs to customers are set to rise.

How does the Ogden Rate work?

In simple terms when the victim of a serious accident makes a Liability Claim, this is made up of various parts. When considering elements of the claim some may require ongoing payments over a number of years, for example long-term rehabilitation costs or reimbursement of lost income. Insurers are required to set aside a large lump sum to meet these costs over the anticipated period the victim will need support. The lump sum is invested and drawn down annually, the Ogden Rate is a fixed rate that Insurers use to assume the level of investment growth of the fund, in the past this meant insurers put less money in the initial pot because a positive 2.50% annual investment growth was assumed.

The effect of the change in the Ogden Rate

The Ogden Rate has been amended from a positive 2.50% annual growth to a negative 0.75% annual growth, meaning insurers now need to put more money into the initial pot to pay for the rest of life care and other heads of claim brought by an accident victim.

What does this mean for the Insurance customer?

There are two massive impacts on customers resulting from the Ogden Rate change. The first obvious change will be increased insurance premium charges to customers. Every Insurer in the market has seen their cost base jump by a huge factor beyond their control and the nature of insurance means these cost increases are passed on to customer through insurance premium rises. Policies including Motor, Public Liability and Employers Liability, will see an increase in premium costs over the next 12 to 24 months.

The second more subtle impact of the Ogden Rate change can be seen in the real claim example above. With the large increase in the size of claim being set aside by Insurers, policy holders will need to look closely at the level of indemnity they purchase to ensure the higher claims are properly insured. Naturally this will have an impact on cost of insurance premiums to customers as well.

What customers should do now?

Since the Ogden rate change has already come into force policyholders should immediately review limits of indemnity to ensure these are adequate. You should speak to your representative at Butler Evans who can assist you to assess ther limit of indemnity you might need.

Risk Management is even more essential for everyone to consider

Moving forward the only meaningful way to address increasing insurance premiums will be to develop stronger and more effective risk management systems to help reduce frequency and severity of loss. Butler Evans have promoted good risk management culture for our customers andf your representative will be happy to help you review your current risk profile.