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What is the Ogden Rate and why does it matter?

by Steph Savill

The new Ogden Rate will have a dramatic effect on car insurance rates, affecting young and old drivers in particular, and yet few motorists know that this exists or what it means.

Keeping my explanation as simple as possible, for the last 14 years the Ogden Rate has been 2.75% when it is applied to compensation awards following life-changing personal accidents on our roads.

But from 30 March 2017 the UK government is adjusting this to a rate of minus -0.75%.

Compensation awards should always put the claimant in the same financial position had they not been injured, including loss of future earnings and care costs.

This percentage rate is clearly critical as it enables claimants to secure fair annual compensation to last them throughout their lives. After calculating and agreeing the claimants’ needs and costs the Ogden Rate is then applied to safeguard this on an annual basis, before arriving at a total and final compensation fund in this way.

For example, if the accident ‘victim’ were in their 70s or 80s the compensation award will be smaller than one for a child or teenager who might have been seriously injured in a car accident. Maybe they would be unable to work at all and live for some 60+ years afterwards?

Interest and Ogden Rates

We all know that today’s interest rates are low and have been for a long time. But even our risk averse motor insurers were unprepared for the Ministry of Justice reducing the Ogden Rate by a dramatic minus -3.50%. Which means you need a bigger fund from the off to maintain the required annual compensation levels.

And this is to take effect from 20 March 2017 and apply to existing compensation funds.

Known versus unknown Ogden Rate factors

It’s relatively easy to predict the impact of this drop in rates on compensation funds, by calculating individual scenarios based on the age and life expectancy of claimants.

For example, figures calculated by insurer LV= illustrate that should a 25-year-old sustain a moderate brain injury and be awarded £100,000 a year for life, under the old system the total payout for the insurer would be calculated as £3.1m. But under the new discount rate, the same claimant would be awarded £8m.

But it’s much more difficult to predict who will cause (or be affected by) a life-changing personal injury in a car accident. And therein lies the dilemma for insurers and motorists ultimately.

The problem is how to calculate who pays as well as the likely increased liability arising from serious accidents which can’t be predicted accurately. Plus the potential new exposure re uninsured drivers, added legal costs, NHS medical claims and the potential for fraud that seems to grow alongside insurance claims.

And we must remember that, whilst insurers are bearing the brunt of significant losses now, they’ll be passing these and their future liability on to UK motorists with immediate effect.

The consequences of the new Ogden Rate

Ageas posted a €25m loss from its Special Risks unit and set aside €55m for the anticipated review of the Ogden discount rate.”

Direct Line posted a pretax profit of GBP278.8 million for 2016, down from GBP580.4 million the prior year, as a result of one-off costs related to the cut to the Ogden discount rate.”

Aviva is making a £380m charge to account for the change in the Ogden rate.”

To spread the projected new Ogden Rate risk across ALL motorists might be the only way forward because even the best drivers and the safest cars can be involved in road accidents, affecting other motorists and pedestrians.

If a bad and life-changing personal accident arose, involving me in any way, I’d want to be 100% certain that anyone adversely affected would be fully compensated for life. How could any responsible driver think otherwise?

So we’ll have to wait and see if the insurers who have supported FOXY Lady Drivers to date are able to continue to favour the gender advantages of an all female portfolio of drivers, who join us to enjoy a package of motoring services that are designed to make them safer and more responsible at the wheel.

Always Read Car Insurance Small Print

We can all expect Insurance terms and conditions to be tightened up. Yes, ideally premiums should reward responsible driver training and education initiatives but we’d also like to see more emphasis placed on driver responsibilities for running and maintaining safe vehicles.

And when 40% of cars fail their first MoT road safety test after 3 years on our roads, it makes no sense for our government to contemplate extending that first MoT to the 4th year.

And knowing the Tyresafe and Highways England survey findings, suggesting 10 million vehicles had illegal tyres in 2016, tyre safety attitudes among motorists are an even greater cause for concern BECAUSE when tyres are unroadworthy, the effectiveness of the vehicle’s braking and steering systems are significantly compromised.

For now however, the predictions are that an average car insurance policy is likely to cost £50 to £75 more each year, whilst older drivers could pay some £300 more (over 65s) with young drivers (18-22 years) facing up to £1,000 in extra premiums.

Having recently had to fork out for a premium tax and after hearing that insurers were making headway re whiplash claims it seems as if the motorist is being clobbered yet again. And this might be the last premium straw for young drivers who seem to be being priced off our roads.

This is why the Ogden Rate is so important for insurers and motorists alike.

FOXY Steph

_PS: Women who register for a car insurance quote from FOXY Lady Insurance will receive a lifetime Online Member subscription to FOXY Lady Drivers Club

Steph Savill Steph Savill

Steph runs a motoring club for women called FOXY Lady Drivers Club, a female friendly garage network called FOXY Choice and FOXY Lady Insurance.

In her spare time (!) Steph provides consultancy services for motor industry businesses who’d like to be more female friendly as well as employers of choice by women in future.

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