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Monday, 15 May 2017

Member Blog: How do Ogden tables affect your insurance?

By Nigel Bailey of Wrightsure in Stockport.
The consequences of the Lord Chancellor’s decision to amend the rate of the Ogden tables to -0.75% will easily by be overlooked by many people. However, what will not be overlooked is your insurance premium when it jumps up at renewal by anything from 10% to 20%!
All liability and motor premiums will be affected and there is no escaping the fact that insurance premiums will be on the increase in 2017.
Understanding Ogden – The Ogden tables help Actuaries and Lawyers to calculate the lump sum of compensation due to an individual or family. The calculation is generally used on large personal injury claim settlements where the injured party is severely incapacitated and unable to enjoy their former quality of life.
Large settlements comprise of two components:
1) a lump sum paid by the insurer which is lower than the total agreed compensation.
2) interest the claimant can earn through on investments.
Together these are supposed to deliver the agreed settlement sum which can typically run into tens and hundreds of thousands of pounds.
Since 2001 the calculations have been based on the assumption that the injured party can access an interest rate of at least 2.5% from a lump sum investment. However, due to the sustained period of low interest rates the Lord Chancellor has moved the discount rate to -0.75% as of 20 March 2017.
For every thousand pounds paid in settlement £25 was formally supposed to have been delivered by the 2.5% interest accrued each year. This meant the insurer only paid £975.61p for every £1,000 awarded. With the new rate insurers, will now have to pay £1,007.56p for £1,000 awarded.
This will ultimately add up to millions of extra pounds for insurance companies to find to settle claims leading to just one outcome – an increase in premiums for you the customer.
The amended Ogden rate has already been reflected tin Aviva’s UK’s general insurance full year results for 2016 leading the combined operating ratio (COR) to deteriorate to 106.3% compared to 95.0% in 2015.
As just one example, Aviva recently noted in the results that without the impact of Ogden changes the COR would have improved to 94.9% increasing their operating profit on the previous year.
Many other insurers are in a similar position and rate increases will be the only solution to this significant ruling.
So, what we are likely to see in 2017 is probably the largest increase in premiums since the aftermath of the twin towers terrorist attacks back in 2001. Many insurers were caught with huge exposures which they were not aware of and the reinsurance market was heavily hit. As a consequence, premiums jumped for everyone, insurance premiums hardened and the insurance market went through new wave of regulation and amendments solvency ratios.
Many regard the timing of this ruling as a poor judgement as with article 50 apparently being triggered recently uncertain times are ahead for many UK businesses and increases in insurance premiums will certainly not be welcomed.
If you have concerns then I would suggest that you speak to your broker and agree a strategy with them on how to minimise any increases your business may face.


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