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Announcement of new Ogden Discount Rate brings certainty...for now

On 2 December 2024 the Lord Chancellor Shabana Mahmood announced an increase to the Personal Injury Discount Rate in England and Wales from the current minus 0.25% to plus 0.5%1,2,3. This is the so-called ‘Ogden’ Discount Rate used for determining the amount of lump sum compensation paid for loss of earnings and future care costs. It affects awards for severe and catastrophic injury, for example those resulting from serious road traffic accidents. As such it has a far-reaching impact affecting claimants, insurers, reinsurers and ultimately the consumer.

With the new rates for Scotland and Northern Ireland already announced in September4, the Ogden Discount Rate for all four nations in the UK are now aligned. Likewise, the new 0.5% rate sees the Ogden Discount Rate re-enter positive territory for the first time since February 2017 when the then Lord Chancellor, Liz Truss, announced a rate of minus 0.75%.

The Damages Act 1996 required Shabana Mahmood, when making her determination, to consider the returns available from a low-risk investment portfolio, inflation, the impact of fund management charges and taxation. With the Bank of England real yield curves having been camped in positive territory throughout 2024, the Ogden Discount Rate now doing likewise should therefore not have been much of a surprise to anyone.

The increase of 75 basis points in the rate announced today will decrease lump sum compensation payments for life changing injuries, reducing claims costs for insurers and other compensators.

The Ogden Discount Rate is just one of many factors affecting the price of motor insurance. The reduced claim costs as result of new rate will mitigate some of the other cost drivers. Any reduced inflationary pressures on premiums will, of course, come as welcome relief to consumers following an average increase in motor insurance premiums of approximately 40% over the past two years5,6.

This latest announcement also marks the end of years of speculation surrounding what the next Ogden Discount Rate would be.

Arguably, the Lord Chancellor could also have waited until 11 January 2025, the date the new rate will be effective, to make her determination. However, the change announced is retrospective, impacting large personal injury claims reported to insurers over the last decade or so which are yet to be settled. An announcement this side of Christmas therefore allows insurers’ finance and actuarial teams to estimate the impact of the new rate on their 31 December balance sheets.

As an added bonus, the pre-Christmas announcement also brings greater common ground for insurers and reinsurers concerning the negotiation of Motor Liability Excess of Loss Reinsurance Treaties that renew on 1 January 2025.

The Lord Chancellor’s announcement marks the end of another significant chapter in the decades-long legal story on how the Discount Rate for Personal Injury claims should be set. The Act requires that the rate will be set by the Lord Chancellor at least every five years following consultation with an independent expert panel and HM Treasury.

Looking forward to the next chapter, we anticipate a period for all in the compensation ecosystem to work out what the new rate means for them. Then, by 2028, speculation will rise again about what the next Ogden Discount Rate will be.

The speculation is over, long live the speculation!

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References

1. London Stock Exchange RNS Announcement 2 December 2024: Personal Injury Discount Rate - 07:00:02 02 Dec 2024 - News article | London Stock Exchange
2. Ministry of Justice Information about the Personal Injury Discount Rate review 2024: Personal Injury Discount Rate - GOV.UK
3. Government Actuary’s Department news story on Personal Injury Discount Rate - England and Wales: https://www.gov.uk/government/news/personal-injury-discount-rate-england-and-wales
4. Government Actuary’s Department news story on Personal Injury Discount Rates in Scotland & Northern Ireland: Personal Injury Discount Rates in Scotland & Northern Ireland - GOV.UK
5. The average price paid for motor insurance at £561, up 29% over the last year (ABI Motor Insurance Premium Tracker, Q3 2023) on Stuck in overdrive! Record motor insurance payouts keep motorists moving. | ABI
6. The average cost of motor insurance in the third quarter of this year was £50 (9%) higher than the same period in 2023 (ABI Motor Insurance Premium Tracker, Q3 2024) on Motor premiums fall for the second consecutive quarter | ABI


Resources:

UK personal lines: calm after the storm? | Deloitte UK