What the Ogden rate 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
- The change in the Ogden rate – a system used to calculate personal injury pay-outs – has increased the size of such claims
- We explain what customers need to know about the Ogden rate changes, and discuss how to reduce the likelihood of catastrophic injury claims occurring
The cost of liability and bodily injury claims against local authorities has been rising steadily, and is 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 from 20th March 2017 – the system used to calculate personal injury compensation awards (see boxout) – has had a 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).
What will the discount rate change mean for Liability and Motor premiums?
The discount rate reduction in 20th March 2017 has given rise to an increase in the size of compensation awards for large and catastrophic claims. As a result, local authorities have to seriously consider increasing the indemnity limits on their public liability insurance, which will in turn result in a rise in their premiums.
However, another big change that local authorities may 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 change in discount rate from +2.5% to the current discount rate of -0.75%. Whilst the new Lord Chancellor and Justice Secretary, David Lidington has announced measures to change and improve the way the discount rate is calculated, it’s unclear when these changes will be implemented. 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.”