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Underinsurance: Are You Adequately Protected?

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Have you considered what this means to your and your business?

On Monday 27th February it was announced that the Ogden discount rate will be reduced from +2.5% to -0.75%. This presents a significant change in terms of how serious injury awards are calculated and will increase compensation payments that are awarded.

What is the Ogden Rate?

Fixed by the Lord Chancellor, the Ogden Rate is a Government set rate used to calculate the amount of compensation as a lump sum the court will award when a personal injury claim occurs for a life changing injury.

The discount rate takes into account age, gender, working life based on likely retirement age and for lifetime losses of the claimant.

Interest rates have fallen since the Ogden Rate was last adjusted in 2001, which means that less investment income is available today. To ensure that the claimant is fully compensated the settlement needs to be higher – the lower the Ogden Rate, the higher the compensation needs to be.

This change has been made as the Government wants to ensure that claimants receive the appropriate amount of compensation for the remainder of their lives.

How does this Affect Me and My Business?

The change to the Ogden Discount Rate will apply to all claims settled on or after March 20th 2017, regardless of when the loss occurred. It will therefore have a significant impact on the cost of future settled claims.

  • Risk of being Underinsured

The change in the Ogden Rate will result in seriously injured persons being awarded significantly            higher compensation payments. This may leave businesses at risk of being underinsured on their            policy limits such as public, product and employers liability.

The current statutory minimum requirement for Employer’s Liability cover is £5,000,000, although the normal market indemnity limit is £10,000,000. With compensation claims now being significantly higher it will be up to the company to fund any gap between the limit of indemnity and the cost of the claim, which could result in the bankruptcy of some businesses.

  • Increased Premiums

With the increased exposure on claims, we expect that insurance premiums will start to see an increase when your policy falls due for renewal. Any insurance policy that includes liability (public, employers, motor etc) will see their premium being increased accordingly.

Ogden Rates in the Real World

The change in the Ogden Rate may not appear to be a great deal but the real life example below clearly demonstrates the impact it can have on personal injury claims.

A 30-year old supplier (John) falls down some stairs in your factory as the handrail is broken, causing a serious injury. At the time of his accident, John 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 is currently £75,000 per year.

John’s claim is going to be settled by an insurer paying a single lump sum, which needs to reflect the future loss of earnings and the future cost of providing care. This is achieved through a multiplier which is applied in line with the Discount Rate which applies.

Calculation of future cost of providing care and loss of earnings:

Pecuniary Loss of Life
Discount rate 2.50% -0.75%
Multiplier applicable to discount rate 29.6 71.43
Annual Care Costs  £           75,000  £           75,000
Total Claim Cost  £      2,220,000  £      5,357,250
Loss of Earnings
Discount rate 2.50% -0.75%
Multiplier applicable to discount rate 22.84 38.71
Salary at time of injury  £           25,000  £           25,000
Total Claim Cost  £         571,000  £         967,750


Overview of Total Claim

Old Discount Rate New discount rate Difference
Pecuniary Loss of Life Claim  £      2,220,000  £      5,357,250  £ 3,137,250
Loss of Earnings  £         571,000  £         967,750  £    396,750
Total Claim Cost  £      2,791,000  £      6,325,000  £ 3,534,000


As demonstrated above, the change in Ogden Rate has significantly increased the claim cost now applicable and, in this example, exceeded the typical public liability limit our clients purchase.

What Should I Do?

As you can see from the example above, the changes to the Ogden Rate could potentially have a real impact on your organisation should a life-changing personal injury claim ever arise.

We recommend that you take this opportunity to review your existing insurance cover levels to ensure that your business is still adequately protected. Our team are on hand to discuss this with you further on 0345 450 7171 should you have any queries.

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