You may have heard or read about the Ogden rate in the news. Having been heavily featured in the first quarter of 2017, many organisations are now facing higher premiums at renewal as a result. But what is the Ogden rate and what impact might it have on your charity insurance?
What is the Ogden rate?
The Ogden rate (or the Discount Rate) is set by government and affects the amount of compensation a person receives for a personal injury claim. The discount rate is in place to ensure that injured parties are not over- or under-compensated when considered against factors such as interest rates and mortality.
The basic principle of the discount rate is that compensation will accrue interest once it has been paid and that may lead to over-compensation. Also, for compensation relating to life-long care, mortality rates will affect what the correct amount of compensation is. Using these factors, a rate is determined by which lump-sum payment is adjusted before being provided to the injured party.
How is the rate changing?
The Ogden rate has changed from 2.5% to -0.75% as of 20th March 2017. The Telegraph demonstrated the changes in the following explanation:
For instance, under the old rate, an insurance company would need to pay out £975 to a claimant to cover a £1,000 loss. That’s because: £975 x .025=25, £1000 – £25= £975.
In other words, under the old system, the claimant was expected to earn 2.5pc interest a year on a lump sum payment of £975, which would yield £1,000.
Under the new -0.75pc rate, the insurance company will have to pay £1,007.5 in compensation because: £1,000 x 0.0075 = £7.5, £7.5 + £1,000 = £1,007.50.
So, what does this mean for your charity, social enterprise or faith-based organisation?
The ABI (Association of British Insurers) have estimated that up to 36 million individual and business motor insurance policies could be affected. But this change is not limited to motor insurance, it is likely to affect all insurances that may compensate for personal injury claims, including commercial liability insurance.
No matter how your charity is insured, or who with, it probably has at least Public Liability and Employers’ Liability insurance. Both insurances can provide compensation for personal injury claims (depending on the circumstances) and therefore may both be affected by the change in the Ogden rate. As claims become more expensive for these sections of cover, insurers may increase premiums to cover their losses.
What can you do about it?
Sadly, the Ogden rate is likely to have an impact on motor and commercial liability premiums across the country. If you are concerned that your premium may be about to rise at renewal, you might consider speaking to us about how you can improve your risk management and potentially reduce your premium. You may also consider moving to a specialist insurer that may be able to offer lower rates. You can read about our specialist charity insurance and request a quote on our website.