What the Ogden rate cut means for local authorities
- In recent years, there has been a sharp rise in the size of liability and bodily injury claims against local authorities
- A significant reduction in the Ogden rate – a system used to calculate personal injury pay-outs – will increase the size of such claims even further
- We explain what customers need to know about the Ogden rate reduction, and discuss how to reduce the likelihood of catastrophic injury claims occurring
The cost of liability and bodily injury claims against local authorities have been rising steadily, and are now likely to take a significant leap upwards.Local Authorities have been managing a changing risk profile across roads, highways, social services and other areas of responsibility for many years with fixed or reducing budgets.
In the past three–five years, injury and liability claims have been increasing in size as the impacts of Periodical Payment Orders, exceptional developments in medical science and a more litigious culture take effect.
The government’s decision to reduce the discount rate – the system used to calculate personal injury compensation awards (see boxout) – will have a further dramatic impact on insurers and customers.
What is the discount rate and how has it changed?
The discount rate is a tool designed to ensure claimants are not under or over-compensated. It adjusts personal injury damages awards to take into account the return expected when a compensation lump sum is taken, which can then be invested.
The discount rate is used in conjunction with the Ogden tables to calculate lump sum damages for future losses in personal injury and fatal accident cases. (see boxout for a more detailed explanation).
In February, the Lord Chancellor, Liz Truss, announced the rate would be cut from 2.5% to -0.75%, a move that shocked many in the insurance industry.
Philip Hammond, the Chancellor, has subsequently said that the Government is to consult on the changes.
Russell Corbould-Warren, Head of Technical Underwriting, Zurich Municipal, said: “Much like the rest of the industry, we were taken by surprise by where the rate landed. We had anticipated a reduction, but a drop to -0.75% was significantly further than we had anticipated.
“Even a small difference in the discount rate will make a significant difference for claimants, customers and insurers.”
What will the discount rate change mean for Liability and Motor premiums?
The discount rate reduction will increase the size of compensation awards for large claims and catastrophic claims. As a result, local authorities will have to seriously consider increasing the indemnity limits on their public liability insurance, which would mean a rise in their premiums.
However, another big change that local authorities could notice is in the way they handle claims in-house, as Rod Penman, Head of Sales, Zurich Municipal, explains.
“Most local authorities, certainly most single-tier authorities, will have a deductible of at least £100,000. In recent years, many authorities have increased the size of the deductible significantly, up to £1m in some cases.
“With the prevalence of significant deductibles, it means that the biggest insurer of local authorities is actually the local authorities themselves.
“This is where local authorities could notice the biggest shock, because the size of the claims they are handling in-house will increase, and they may find they have not budgeted the right amount to handle all these claims.”
What should local authorities do?
It is important to ensure your authority has fully considered the implications of the discount rate reduction.
You should also consider whether there are any measures you could take to reduce the likelihood of catastrophic personal injury claims occurring in the first place.
Penman says: “Once an incident happens, you have no control over whether it will lead to a minor claim or a catastrophic claim.
“With slip and trip claims, for example, a claimant could fall and break their wrist or they could suffer a serious head injury, which could lead to them requiring a lifetime of care.
“The only way to stop catastrophic claims is to make sure your risk management is robust.”
Our recent article, How to avoid public liability claims, discusses the range of risk management support we are able to offer our customers.
Corbould-Warren adds: “Our risk management and risk engineering services are a first line of defence support for our customers. We have the skills, the knowledge, and the expertise to hold our customers’ hands through the challenges ahead.”