Former Lord Chancellor, David Gauke’s parting gift before he bowed out of government last month, was to increase the Ogden discount rate from – 0.75% to – 0.25%.
Whilst this represents a welcome correction to the "ludicrous" – 0.75% rate introduced in 2018, it went directly against the advice of the government Actuary, who stated that a rate of +0.25% would be fair to claimants but reduce the risk of them becoming over compensated.
The result of his surprising decision will make life more expensive for motorists and businesses up and down the UK.
The discount rate is the amount that you decrease or increase the injury award to take account of the effects of investment returns and/or interest over the period the payment was made to cover.
When it’s negative to have to increase the amount you pay the claimant. The change from -0.75 to -0.25% is expected to save the industry between £320 Million and £500 Million a year, which at first glance seems like good news. The trouble is that the industry had been told to expect something around +0.25% to reflect the current and expected interest rates over the next few years.
Of course no one wants to see victims of accident or injuries not getting a fair settlement, but we can take no comfort in paying over and above what is fair and reasonable when these extra costs have to be passed onto innocent motorists and to business in unnecessary increases to insurance premiums.
In addition when the discount rate is over generous, our already hard pressed NHS is burdened with millions of pounds worth of extra costs, which would be far better spent on patient care.
For the past 12 months insurers have been lobbying government and have been lead to expect that the rate would be corrected to somewhere between 0 and 1%. They have factored this into their pricing and now that the rate has been set much lower, find themselves many millions of pounds under resourced, based on this negative rate. One insurer has calculated that they alone will need to immediately adjust their claims reserves by £13 Million, which will have to be passed on to their policyholders.
Almost every other insurer is in a similar position meaning that rates for motor and liabilities will have to be increased placing yet another burden on the insurance buyer and yet another limiting factor for the country’s economic growth at a time when we need investment. Insurance for the Construction Industry is currently experiencing difficult market conditions, with price increases and insurers pulling out the market. This can only make matters worse.
The insurance industry, the NHS and the insurance buying public will probably not be very sad to see Mr Gauke go !
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