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Ogden Rate Changes: What does it mean for small business?

Unpicking the Ogden Rate and what changes could mean for SMEs

The insurance world was rocked earlier this year with news of a big shake-up concerning personal injury pay-outs. The Ogden rate, a discount rate set by the Government, took an unexpected swing from 2.5 per cent to -0.75 per cent.

What does it mean?

The aim of insurance is to put a claimant back in the same position as they were pre-event. So if an insurance company is making a payment over a period of time, the person should not get too much or too little. A lump sum pay-out can equate to a considerable amount of money which once invested can earn a person an equally substantial amount of interest.

To balance this, an allowance is made by the courts to reflect the potential interest earned over a period of time. The final sum is therefore discounted by the amount of interest the claimant can expect to earn over that period (i.e. the Discount or Ogden Rate).

The Ogden Rate is the calculation set by the government and used by insurers to determine the exact amount of money that an insurance company should pay out in the event of a life-changing injury. The amount takes into consideration loss of earnings and the cost of future care, and factors such as age and predicted mortality rate. The rate is linked by law to returns on the lowest risk investments, typically Index-Linked Gilts (or Government bonds).

Why is it important?

Unfortunately the yield on Government bonds has plummeted since 2001 when the last Ogden Rate was set. At that time, unlike in 2017, there were positive interest rates and good returns. With the Ogden Rate now set at the minus figure of -0.75, it means insurance companies will face a lower return on investment because they’re paying out a higher lump sum. For example, under the old Ogden Rate, a 30 year-old plasterer with a traumatic brain injury may have received £2.24m. Under the new Ogden rate, the pay-out would be £6.14m.

While the new Ogden Rate is concerned with pay-outs following the most serious of injuries, the changes are likely to have wider implications particularly on insurance premiums subject to long-term awards. The premiums likely to be affected are: motor, employer’s liability and pollution liability, to name a few.

What should SMEs do?

Small businesses can expect a review of their insurance premiums at renewal, as insurers adjust their prices. Some policies will increase in price, but it will vary according to what work they do. For example, if they manufacture a product or have employees in hazardous trades, it is likely these types of business will see a change in their premium.

But it’s not all doom and gloom. There are a few simple steps SMEs can take to help reduce their insurance costs while still maintaining peace of mind.

  1. Contact an insurance broker to help you understand what level of cover your business needs to protect itself. Have facts and figures ready to hand to help inform decisions.
  2. Regularly review your insurance policy and notify your provider of any changes that may affect your level of cover.
  3. Don’t be tempted to under-insure your business in order to reduce premium costs. Having the right level of cover will mean you get back on your feet more quickly when things go wrong.
  4. Stay ahead of the game and renew your policy early to avoid paying more than you need.
  5. Adopt a proactive approach to risk assessment in order to help identify and eliminate potential hazards/accidents in the work place. Less risk will usually mean lower premiums.