An article from the insurance industry – today by our colleague Simone Hoffmann
The British government is not only chaotic when it comes to brexite. Now London seems to want to backtrack on the Ogden rate. The prescribed reduction of the discount rate applicable to pension claims to minus 0.75 percent at the beginning of the year cost the insurance industry £3.5bn. Simone Hoffmann explains what this means for German customers.
Ogden Tables are a series of standardised, statistics-based tables which are essential in the UK for the calculation and settlement of lump-sum compensation payments for personal injury. This is to ensure that a seriously injured (disabled) person receives sufficient financial security for their future pension and adequate compensation for their loss of earnings. When calculating lump-sum compensation for personal injury (one-off payment), the return (via discount rate) that the claimant should have expected from a reasonable and prudent investment is taken into account. According to § 1 Damage Act 1996, the discount rate is not determined by the insurers, but by the government.
The previous discount rate of 2.5 percent was set in 2001 and reflects the redemption yields of index-linked government bonds at that time. Since March 20, 2017, it has been reduced by 3.25 percent from 2.5 percent plus to minus 0.75 percent. The change applies retroactively to all current claims for damages and, of course, to new damages.
The reduction of the rate to minus 0.75 percent has the consequence that sustainably injured persons will receive significantly higher compensation payments than before. Existing reserves in ongoing claims negotiations must be increased by the insurers in order to take these changes into account. But it will not only happen on the backs of the insurers. This far-reaching effect on the settlement costs of personal injuries will in turn be taken into account by insurers when calculating their rates, which will lead to significant additional premiums. The most serious changes are expected for the normally locally placed lines of motor liability insurance and employer’s liability insurance. It should be noted that the new discount rate also has an impact on the BHV and associated ProdHV, as personal injury is also insured in these lines of business.
Amounts of cover are not sufficient
In the case of integrated programmes, however, local policies are usually only covered to the tune of EUR 1 million, which should by no means suffice under the new circumstances. Even in the case of coordinated programmes, the amount of cover usually does not exceed three million euros. German master covers, on the other hand, usually have a limit of only ten to 30 million euros. As a result, there is an acute need for action for German policyholders with activities in Great Britain.
The following damage scenario illustrates the concrete effects of the changes: A 30-year-old man is the victim of a traffic accident. At the time of the accident, he had an annual income of £25,000. His injuries are so serious that he can no longer return to his job and is dependent on care for the rest of his life. The cost of care is £75,000 a year. The insurer would like to pay the claim payment immediately after the claim notification as a lump sum. The future financial requirements of the victim are calculated on the basis of various multiples which take into account, among other things, mortality risks and the assumed future interest rate. Since 20 March 2017, the lump-sum, one-off indemnification for the policyholder has thus been £3,534,000 higher and corresponds to an increase of approximately 127 percent.
As the table shows, the compensation must include not only the future loss of earnings but also the costs of future care services. Additional costs incurred in the calculation are e.g.: Lawyer’s fees, therapies or reconstruction costs of accommodation. In this respect, the actual total compensation of this damage scenario is even higher than the table shows.
Is the development described insignificant for German policyholders? I don’t think so. As soon as a German company operates in Great Britain, the insurance regulations there naturally also apply. Some policyholders could now turn their backs and refer to the master programme, whose sums insured ultimately promise sufficient security. This cannot be ruled out, but it will not be the rule. Because one thing