What Does a Change to the Discount Rate Mean to You?
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What Does a Change to the Discount Rate Mean to You?

In February, Lord Chancellor Liz Truss made an important announcement in respect of the Discount Rate, PMF speaks to chartered insurance broker Boswell Aftermarket to see what effect this could have on motor factors.

Discount Rate is used to calculate the amount of compensation to be paid to seriously injured individuals. The change to the rate, announced in February this year, is one which affects the insurance industry as a whole, as well as its customers and claimants.

What is the Discount Rate?

The Discount Rate, also known as the Ogden Rate, forms part of the calculation to determine the level of award in respect of cases involving serious injury. As settlement of a personal injury is designed to provide financial indemnity over a number of years, the amount allocated towards loss of earnings and future cost of care can be high, and is often awarded in a lump sum.

As a result, an allowance is made by the courts in respect of future losses to reflect the fact that the claimant will be able to invest the lump sum awarded and earn interest on that investment over a period of time. The settlement is therefore‘discounted’ by the amount of interest the claimant can expect to earn over that period.

The Discount Rate has changed from 2.5% to -0.75%. This means that, rather than any lump sum award being discounted to allow for a 2.5% investment return, the indemnity settlement will be increased, reflecting a decision that over the long term there is predicted to be a negative return on investment. For example, an award made to a 27-year-old female with a serious life-changing injury will move from £6.5m under the old Discount Rate to approximately £14m under the new one.

What is the impact on policy holders?

The rate change is causing such financial impact on insurers it is impossible for them to absorb the cost, and as a result many are already applying price increases. An individual or company with a policy which covers bodily injury, including Motor, Public/Products Liability and Employers’ Liability are likely to witness a premium increase at their next renewal.

The impact of pricing amendments will depend on a range of factors, including the activities undertaken by the insured, their claims history and their exposure to severe injury losses.

Boswell Aftermarket says the change highlights the importance of working with a broker whose clients’ needs are paramount. The company says its independence provides it with access to a wide panel of insurance partners to ensure clients receive the best possible product for their business, at the right price.

For further information from Boswell Aftermarket, click here

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