We produced an earlier communication in relation to personal injuries compensation. Since then, further developments have taken place. This update explains what these are.
What is the Ogden Discount Rate?
The discount rate is used to calculate the amount of compensation an injured party would receive to reflect the return they would otherwise earn when that money is invested. The aim is to make sure a severely injured person has the necessary financial security to provide for their care and loss of earnings.
Who does it affect?
Businesses most at risk are those with higher potential for large injury claims, such as Construction, Manufacturing and Distribution. The discount affects costs for all businesses which incur claims for bodily injury under policies including Private and Commercial Motor, Motor Trade, Employers’ Liability, Public Liability, Other Liability and Contractors’ Liability.
Clearly in the rural sector there is widespread use of agricultural machinery and vehicles, so businesses and farms all need to be aware of the implications for them.
It will particularly affect large personal injury claims and compensation pay-outs provided for their care and loss of earnings. Until now it has been based on returns on very low risk investments, a calculation that caused it to be cut from 2.5% to minus 0.75% last year.
What does this mean?
- Insurers are increasing all current open and future claims reserves.
- A further review is planned looking into an independent body setting future rates.
- Premiums may increase across the market as insurers try to recoup the cost of claims.
What are the latest developments?
The Government has introduced the Civil Liability Bill to parliament in March, which includes reforms to the Ogden rate calculation. The proposed changes to the way the Ogden personal injury discount rate for serious injuries is calculated aims at putting claimants in the same financial position they would have been in had they not been injured.
In March 2017, the discount rate was reduced from 2.5 percent to minus 0.75 percent, dramatically increasing the size of awards of damages to individuals. The changes to the discount rate now being introduced through the Civil Liability Bill will set the rate with reference to ‘low risk’ rather than ‘very low risk’ investments as at present, and establish a regular review of the rate, the first within 90 days of the legislation coming into force and at least every three years thereafter. The bill will also establish an independent expert panel chaired by the government actuary to advise the Lord Chancellor on the setting of the rate.
The Civil Liability Bill was introduced in the House of Lords on 20 March, 2018. It is then expected to come into law next April 2019. Among other reforms, the bill measures will be supplemented by changes to secondary legislation to raise the small claims track limit to £5,000 for road traffic accident related personal injury claims and to £2,000 for all other personal injury claims, under which threshold litigants will not be able to claim for legal costs. It will also introduce a new series of tariffs relating to injuries captured by the definition of whiplash.
How you can continue to limit your exposure
Any actions which can be taken to reduce the likelihood of large losses will limit the impact of these changes.
We recommend that whoever is responsible for your organisation’s motor and liability insurance considers making risk management an internal part of their role, so that risks are identified and prevented as much as possible. This could also lead to a reduction in the insurance premium that your company pays as its risk profile is reduced.
Ensure that all decisions are recorded, training is up to date, and all risk assessments are fit for purpose. Should an incident occur, there needs to be a thorough investigation to evaluate the evidence and to decide whether to accept liability or defend.
Create effective accident policy documents and an accident management programme. Identify and train employee’s investigative technique. In the event of an accident, record dimensions, weights, distance and light. Identify witnesses and take neutral statements.
Review your liability limits with your broker to make sure you have adequate cover
It remains very early stages in the process. As a trusted advisor, we see it as our duty to keep you informed of any developments that may impact your business and provide clear and effective recommendations. We will provide any further updates on the personal injury discount rate as it arises but in the meantime, please do not hesitate to contact us if you have any questions.