Increases in payouts to victims of car crashes and botched operations are to be scaled back after a furious backlash by the insurance industry against Ministry of Justice plans.
In a significant U-turn by ministers, changes to the so-called “Ogden rate” used to calculate compensation payouts are to be revised, after insurers said they would inflate car insurance premiums by hundreds of pounds.
When the government cut the rate from 2.5% to -0.75% in February in a surprise move, there was an outcry from insurers. After a consultation, the Ministry of Justice has proposed a rate of between 0% and 1% in draft legislation.
The change appears small, but the mathematical implications for payouts can be very significant. When the new Ogden rate was imposed in February, insurers said the compensation figure for a brain injury on a 25-year-old could soar from £3m to £8m, and that the NHS and other parts of the public sector could face an extra £6bn bill.
Shares in insurance companies rose on news of the Ogden reform, with Direct Line closing up more than 2%. The formula is used to calculate lump sum compensation payments to people with serious injuries, to ensure inflation does not erode the future value of a payout. The lower the rate, the higher the lump sum.
Insurers had argued that the February change would overcompensate victims of car crashes, although personal injury lawyers said a new rate was vital to ensure that victims received proper care and compensation.
Mohammad Khan, UK general insurance leader at auditing group PricewaterhouseCoopers, said car insurance premiums rose by £75 on average and by £250 for young drivers after the February change.
Premiums were expected to rise by a further £100 on average, or £300 to £500 for young drivers, in November and December, as insurers planned to pass their increased costs on in full. Assuming the revised Odgen rate becomes law, premiums should stay stable in coming months, or could even fall.
Tony Sault, UK general insurance leader for consultancy firm EY, said: “We would expect the recent rise in premiums to level off in anticipation of the new legislation, and ultimately premiums could fall between 2% and 4%, saving up to £21 on the average premium to the consumer.”
For people with serious injuries it is bad news as payouts will be lower than expected.
Brett Dixon, president of the Association of Personal Injury Lawyers, said: “The discount rate must be set to meet the needs of catastrophically injured people. Someone with a life-long, life-changing injury such as brain damage or a spinal injury cannot afford to take any risks with how his/her compensation is invested.”
He added: “This rate was wrong for many years and it has been cut right recently ... We need to examine the detail. We need to focus on meeting the needs of the injured person with 100% certainty.”
Lawyers are also pressing the government for more clarity. Sarah Stanton, partner at law firm Moore Blatch, said: “Until the timetable of this legislation is clarified, the value of the compensation that claimants can seek in the most serious cases will remain uncertain.
“We welcomed the decision to reduce the Ogden rate from 2.5% to -0.75% this year – a long overdue change that corrected the balance in compensation, in favour of the victims of serious injuries.”
The AA gave a “cautious welcome” to the Ogden re-set. Its director of insurance, Michael Lloyd, said: “The new rate must be adjusted to set a realistic and fair rate for both victims and insurers.
“This draft legislation is being put before parliament, but there’s no guarantee that it will be enacted.
“We predicted in July that as a consequence of these entirely avoidable government-prompted increases including a doubling of insurance premium tax over the past couple of years, more young drivers would risk illegal ways of getting behind the wheel and sadly, that has come to pass.”
