Counting the cost of Ogden
RECENT machinations at Westminster and the promise of an additional £1 billion for Northern Ireland have left other UK devolved regions feeling understandably disgruntled.
The move has had backbench Scottish MSPs and Welsh AMs – and a not few journalists - scrambling for a guide to the Barnett Formula, the mysterious system which helps allocate public sector spending across the UK. Where is our slice of the cake they vainly enquired?
But Barnett isn't the only arcane formula at the disposal of government to regulate finances. In the insurance industry we have our own systems, some of which make Barnett look like pre-school arithmetic.
Take for instance the Ogden Discount Rate. It sounds dull, but changes to it are anything but – with the potential to impact 36 million business and individual motor policies as well as employers liability, small business insurance and even clinical negligence claims against the NHS.
Who or what is the Ogden Discount Rate? While naming rights for Ogden appear to have been lost in the mists of time, the short explanation is that it helps calculate serious personal injury claims. The slightly longer explanation is that it is an adjustment to the lump sum awarded which takes into account the amount of interest which could be expected if invested.
Granted, this is not the stuff of tabloid headlines and it's probably not that surprising that few outside the insurance industry picked up on government's plans in March to change the rate from 2.5 per cent to minus-0.75 per cent. The effect of Ogden and changes to it, however, are incredibly far reaching.
The net result is that insurers will have to pay out considerably more in claims, and unlike some politicians, the insurance industry doesn't have access to one of those elusive ‘magic money trees'. Extra costs have to be met by savings from already lean insurance companies, the taxpayer and increased costs for consumers. This is particularly unwelcome as the move coincides with yet another hike in the painfully stealthy Insurance Premium Tax.
One rationale for the change in the Ogden Discount Rate is that it will encourage safer driving. It's accepted that adjusting the rate will have the biggest impact on motor insurance (car accidents are the main source of major personal injury claims). If premiums continue to rise, the theory goes that there will be greater pressure to cut the incidence of accidents as the means to reducing risk and, therefore, premiums.
There are practical steps which fleet operators can take now to minimise their own risks – look again at your training regime, the calibre of drivers, health and safety protocols and vehicle maintenance. Also, expect insurers to increasingly reward business customers who use technology such as telematics to help manage their fleets.
Government, of course, likes to take with one hand and give with the other. Another consequence of that £1 billion deal for Northern Ireland is that the government was able to pass its Queen's Speech. Although Brexit will dominate this Parliamentary session, there were other legislative ambitions, including The Prison and Courts Bill which contains clauses to tackle fraudulent claims.
Minor whiplash claims could be capped or even banned, potentially reducing premiums by £40 per annum. Some potential light relief then for insurers and customers, but let's wait and see how the legislation evolves first.
:: Michael Blaney is managing director of the Autoline Insurance Group (www.autoline.co.uk)