The Lord Chancellor and Justice Secretary, has cut the discount rate - also known as the Ogden rate - which affects the calculation of compensation awards for serious personal injuries, from 2.5% to minus 0.75% effective 20 March 2017.
The rate is used by courts for victims of life-changing injuries who accept lump sum compensation payments. The objective is to make sure a severely injured person has the necessary financial security to provide for their care and loss of earnings. The discount rate is used to calculate the amount of compensation they receive to reflect the return they will earn when that money is invested.
The discount rate has been unchanged since 2001 and the Ministry of Justice accept that the decision will have "a significant impact on the insurance industry" and a knock-on effect on public services with large personal injury liabilities. This reduction means that those suffering from serious injuries will receive significantly higher compensation payments than before.
The substantial increase affects claims costs for all lines of business which will see claims for bodily injury and claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and business across the UK.
This is one of the most significant changes facing the insurance industry in some time and the Association of British Insurers has warned that up to 36 million customers could face higher premiums after this decision to accommodate higher lump sum injury settlements.
This is an unwelcome change for insurers, brokers and customers alike but one that cannot be ignored. We are now waiting to see what action insurance companies will be taking, what level of premium increases they are considering and what the best course of action is to provide sustainable solutions for our customers.
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