The amount that you will pay for car insurance in England and Wales is likely to climb over the next few months, as changes to the way that serious injury compensation payouts are implemented.
The changes to the Ogden discount rate – which will come into force on August 5th, 2019 – have not come as a surprise to insurers, who actually anticipated the change to be more dramatic. It is for this reason that car insurance premiums are likely to rise.
What is the Ogden discount rate?
The Ogden discount rate – sometimes referred to as the personal injury discount rate – is used in court when determining the amount of compensation that a claimant is entitled to after suffering a life-changing injury.
The rate has risen from -0.75% to -0.25%, meaning that victims will be entitled to less in compensation than they were previously.
Compensation is awarded at a level which will ensure that the victim will receive enough money to cover their future loss of earnings as well as the costs of care.
The discount is applied to take into account the potential earnings – or loss of earnings – an individual would make by investing their compensation into a low-risk investment (such as a government bond).
The higher the discount rate is, the less compensation is paid out – as it stands, the rate of -0.25% anticipates that claimants will make a minor loss on their investment.
How is the Ogden rate calculated?
The amount of compensation you are due is multiplied by the set discount rate.
If you are owed £1000 in compensation, this will be multiplied by 0.0025 (-0.25) to calculate the long-term value of your payout – your compensation will then be adjusted to ensure that you receive an adequate amount.
With the new discount rate, if you are owed £1,000 in compensation, your insurer will need to pay you £1,002.50 to cover the anticipated future loss. This is because:
£1,000 x -0.25% = £2.50
£1,000 - £2.50 = £997.5
£997.5 + £2.50 =£1000
In this example, the insurer would have to pay an additional £2.50 to cover the anticipated losses after investment.
Industry professionals had expected the Ogden discount rate to rise significantly more than it has done and have therefore been pricing previous claims at a rate closer to between 0% and 1%.
This will mean that future personal injury claims will be adjusted to reflect the new -0.25% rate.
And while a rise in the Ogden discount rate should technically see insurance premiums fall, prices could rise as much as £75 as insurers will now have to pay out more than originally anticipated on major injury claims.
Who will be affected?
Everybody who pays for car insurance is likely to be affected by the changes.
Car insurance for the average driver could increase by between £15 and £25 a year, but it is younger drivers who will be hit the hardest by price rises of up to £75 a year.
General insurance leader and partner at PwC, Mohammad Khan, said that insurers had anticipated that the Ogden discount rate would rise since it was originally set at 0.75% back in 2017, basing their insurance quotes on rates of between 0% and 1%.
He added that “in real terms, this means that UK motorists have been paying lower insurance premiums compared to what the industry could have charged them”, but will now begin to pay the price for their insurer’s misjudgement.
The rate had been under review for a number of months, but will now remain the same until it is reconsidered again in 5 years’ time.
Where can I find a good deal on car insurance?
With prices set to rise, it is now even more important that you shop around to find yourself the cheapest car insurance policy on the market.
Luckily for you, Bobatoo can take the bulk of that effort off your shoulders, comparing the cheapest rates from the best car insurance providers in the UK.
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