T he past year or so in the insurance industry has seen some major changes coming into effect which have hit the premiums of both individuals and businesses who take out insurance policies. Why have premiums gone up? Since June of this year, the Insurance Premium Tax (IPT) has gone up to 12%. IPT was first introduced in 1994 at 2.5%, and has steadily increased since then. The last rise was 0.5% in 2016 which took the rate to 10%, but from 1 June 2017, most buyers of insurance policies will have the latest 12% rate added to their premium. Announcing the extra 2% increase, Chancellor, Philip Hammond, said IPT rates in the UK remained some of the lowest in Europe, but the Association of British Insurers (ABI) described the increase as a “hammer blow for the hard-pressed”.
Another reason for increased premiums is climbing repair costs for the increasingly complex technology installed in modern cars. Repairs to sensors, cameras and other high-tech features can easily run into thousands of pounds. As if this wasn’t enough, premiums have been further hit by the ‘Ogden Discount Rate’ which the Ministry of Justice (MoJ) has reduced from 2.5% to -0.75% starting in March this year. What is the Ogden Discount Rate? The Ogden Discount Rate is a formula applied by the courts to the financial award given to a severely injured person so that they have the necessary financial security to provide for their care and loss of earnings. The discount rate is used to calculate the amount of compensation they receive to reflect the return they will earn when that money is invested.
How will the new rate affect claimants? The reduction in the Ogden Discount Rate means that people suffering from serious injuries will receive significantly higher compensation payments than before. The MoJ says: “The law makes clear that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on this lump sum, 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.” Can you give an example? John is 30 years old and was seriously injured in a car accident. At the time of his accident he was earning £25,000 net per annum. His injuries are so severe that he’ll be unable to return to work and he will need nursing care for the rest of his life. The cost of the nursing needed is currently £75,000 per year.
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