UK Government reforms surrounding the way personal injury compensation claims are calculated has sparked a major row between lawyers and insurers.
The kerfuffle surrounds a little known calculation, called the Ogden rate, which has been cut from 2.5pc to -0.75pc and comes into effect on Monday (20 March).
Used since 1999, the Ogden rate assists the courts to calculate how much compensation insurance companies should pay to claimants in cases of serious and life-changing injuries.
The objective of the Ogden rate is to make sure seriously injured claimants have the necessary financial security to provide for their care and loss of earnings. The rate is used to determine the amount of compensation based on the return they will earn when that money is invested.
The lowering of the rate, announced by the Ministry of Justice (MoJ) on the 27 February, is part of major personal injury reforms, which also Includes raising the small claims limit from £1,000 to £5,000 for whiplash claims and £2,000 for all other personal injury claims.
The reduction in the Ogden rate, which has remained untouched since 2001, will mean that on a typical lump sum payment of £1,000, insurers will now pay an additional 7.5 percent, making the new compensation payment £1,007.50 compared to £975 under the old system.
But while this spells great news for compensation claimants, the UK Government has admitted it is likely to have a significant impact on the insurance industry as well as knock-on effect on public services with large personal injury liabilities, particularly affecting the National Health Service and local councils.
The MoJ say the law makes it clear that personal injury claimants must be treated as ‘risk averse investors’, reflecting the fact that because of their injuries they are financially dependent on the compensation awarded, often for long periods or the duration of their life.
“Compensation awards using the rate should put the claimant in the same financial position had they not been injured, including loss of future earnings and care costs.”
The MoJ added that when victims of serious and life-changing injuries accept lump sum compensation payments, the actual amount they received was adjusted according to the interest they could expect to earn by investing it.
Therefore, according to the MoJ, -0.75 percent is the “only legally acceptable rate” they can set.
The UK insurance industry, who were expecting a figure to be set at somewhere between 1 per cent and 4 per cent in line with the rest of Europe, instantly hit out at what they deemed as “crazy” reforms.
Insurance shares fall and premiums set to rise
The announcement caused shares across the insurance sector to fall by as much as 7 percent.
Direct Line was the biggest faller after the announcement, down 7.6%. The group said the impact of the rate reduction would reduce pre-tax profit by between £215m and £230m on its 2016 results.
Admiral Group postponed its full-year results for over a week in order to fully calculate the impact of the change. The company said that the impact of existing personal injury claims settling at the new rate is expected to be between £140m and £175m and the 2016 reported profit will be £70m-£100m lower than expected.
Aviva announced that it would be setting aside an exceptional charge of £385m following the decision.
Esure Group, on the other hand, saw their shares rise by 2.8% after reminding investors they had already budgeted for a cut to 0%, adding that the changes will only reduce the firm’s reserve margin by £1m. The group announced they are still confident that 2016 profits will be “ahead of market expectations” thanks to strong investment returns last year.
Huw Evans, director general of the Association of British Insurers (ABI), called the move a “crazy decision” and said there would be an inevitable increase in motor and liability premiums for millions of UK drivers and businesses.
He estimated it could affect up to 36 million individual and business motor insurance policies while claimants will be over-compensated.
According to Evans, making a significant change to the rate using a ‘broken formula’ is reckless in the extreme and shows an utter disregard for the impact this will have on consumers, businesses and the wider operation of the insurance market.
“We have repeatedly warned the Government this could lead to very significant price rises, with younger drivers, in particular, likely to find it much harder to get affordable insurance.”
The view of the personal injury lawyers
The UK Government has a duty to make sure personal injury claimants receive fair compensation and the review process has been long and controversial.
The Ogden rate hasn’t been adjusted since 2001, although interest rates have dropped sharply since then. The government ran consultations on the issue in 2012 and 2013, but never released the findings.
According to campaigners such as the Association of Personal Injury Lawyers (APIL), the existing rate is far too high.
Neil Sugarman, President of APIL says the rate has been wrong for many years. It assumes a far greater return than can be achieved, so successful claimants “are in grave danger of running out of money.”
APIL’s Chief Executive Officer, Deborah Evans, adds, the lump sum compensation is designed to be sufficient for what the claimant needs – no more, no less.
To put it simply, if somebody is involved in a horrific road traffic accident through no fault of their own, and is left with life changing injuries such as paraplegia or quadriplegia, they are rightly entitled to compensation.
Their life will never be the same again – they may need ongoing physiotherapy or rehabilitation, they may need their property adapting for a wheelchair, they may need carers.
“That’s what insurance is for – the many pay to look after the few,” she adds.
Quentin Underhill, Head of Legal at serious injury claims solicitors, CFG Law agrees with APIL’s assessment, “for too long the rate has been set at unfair levels for blameless victims of accidents. I am pleased that this has now been addressed by the Government and a more realistic rate has been set in line with the current economic climate.
“The injured party should always be at the forefront of people’s mind, and how best to compensate them and ensure they have the necessary support in place for the rest of their lives.
“The rate has been set at unfair levels for too long and I am pleased that this has now been addressed by the Government and a more realistic rate has been set in line with the current economic climate.
“Serious injury compensation claims are not just about giving someone who has suffered a serious injury a sum of money to compensate them for their injuries; it is far beyond that.
“Serious injury compensation is also calculated to pay for the treatment, support and rehabilitation needed to live as independently as possible following a serious injury and to enable the victim to make the best possible recovery.
“This support in many cases is life long, and does not end just because the claim has concluded.”
The share value of some of the UK’s largest insurance companies have fallen and it is anticipated that 2016 profits may reduce by up to £100million.
Insurers have announced that they will have no option but to pass any added costs on to customers through higher premiums and the reforms are expected to mean some individual, household and business insurance premiums could increase by £1,000 and average comprehensive motor policies could be driven up by £75.
However, the real victims, those who have been seriously injured due to the negligence of another party, will at least be in a better position to make better use of what the personal injury compensation is there for.
For good or for bad, personal injury reform in the UK is now all about striking the right balance, and the jury is out as to how we deal with the victims of other people’s negligence.