The Ogden Rate Announcement 2024/25: Reflecting on the Past, Preparing for the Future

In 2017, the insurance industry experienced a seismic shift with the amendment of the Ogden rate, a crucial factor in determining compensation for personal injury claims. This adjustment significantly impacted motor insurance pricing. As we approach the next scheduled change, it’s essential to reflect on the past to anticipate the future implications for the industry. 

The 2017 Amendment: A retrospective 

After 15 years of stability, then Chancellor Liz Truss (yes, the same Liz Truss) announced in February 2017 that the Ogden rate would reduce from 2.5% to -0.75% (the minus rate reflects the likelihood that a claimant’s lump sum is likely to depreciate over time if invested in a very low-risk portfolio). This drastic decision shook the industry and incurred wide-ranging consequences. 

The volatile aftermath of the announcement was depicted by crashing share prices, unprecedented premium increases, and sticker shock among consumers.  

Ian Hughes, CEO of Consumer Intelligence, reflects on the impact: "The 2017 amendment to the Ogden rate was a wake-up call for the industry. It highlighted the vulnerabilities in the system and the need for insurers to be adaptable. The immediate aftermath saw a significant increase in premiums, which was a direct response to the financial implications of the new rate. Insurers had to quickly adjust their reserves to account for the higher payouts, leading to an almost immediate increase in motor insurance premiums." 

In the lead-up to the fateful announcement, Consumer Intelligence data shows average premiums rising in small increments. Post-announcement, a much swifter and sustained upward movement was witnessed. All in all, between July 2016 and July 2017, the competitive end of the motor market inflated by approximately 16%, this was rumoured to cost consumers about £50-£75 and caused a knock-on jump in switching which led to about 500,000 additional consumers switching their insurer. 

Though, having now lived through a global pandemic and the subsequent cost-of-living crisis, most of today’s consumers would likely welcome 16% over 60% any day. Nevertheless, the impact of the 2017 Ogden rate change was significant and demonstrates how pivotal the upcoming announcement is for the industry. 

The -0.75% rate was relatively short-lived, as was Liz Truss’ tenure as Chancellor (and later as Prime Minister). A U-turn decision in July 2019 revealed a new marginally less burdensome Ogden rate of -0.25% (though not quite the 0% or 1% the industry had predicted or hoped for). The question now is which way will the new rate go and by how much. 

Anticipating the next announcement 

It comes as no surprise that the industry is again hopeful for a more favourable outcome this time around to reduce the burden on insurers and potentially lower premiums. 

Ian comments on the current expectations: "The industry is on tenterhooks, hoping for a positive change in the Ogden rate. The financial pressures from the recent years, including the pandemic and economic downturn, have left insurers and consumers alike eager for some relief. A favourable adjustment could ease premium rates and offer some breathing space." 

As part of a recent Government consultation, a multitude of options are being considered, including the possibility for introducing a dual rate to create more equal outcomes between claimants investing over different periods, leaving the upcoming announcement result more uncertain. 

According to Insurance Law Global, the government actuary who will provide advice to the Lord Chancellor carried out the same exercise locally to the Isle of Man. The discount rate was revised from -0.25% to 1% in October 2023, which could signal a positive discount rate change, however this remains to be seen. 

Ian Hughes elaborates on the potential implications of the new rate: "The smart money has the rate at between -0.25% and +0.5% and based on historical trends, a significant increase in the Ogden rate to around 0% to 0.5% is likely to lead to a decrease in car insurance premiums by approximately 5-10%. This will be a welcome relief for consumers but may also create an opportunity for insurers to improve their combined operating ratios if all the amount is not passed on. We are already seeing signs that some insurers are taking bets on a fall and are pricing this into their new business and renewal pricing. That might be a very good move; we will wait and see. Remember, ANY change in premium (not just an upward change) will make shopping and switching spike." 

Predicting market reactions 

Just like this 2017 and 2019 Odgen rate changes, this change is going to be palpable. Consumer Intelligence data shows a small number of insurers already adjusting their strategies, trying to take advantage of the change ahead.  

Ian explains: “Some brands have already priced in the new Ogden rate, trying to mop up volume ahead of the competition. In contrast, other companies will wait until they actually hear the rate before they price it in, and others will wait until it becomes law. There's also the implementation phase on quoting engines to consider. Insurers will be jockeying for their optimum competitive position, creating a pendulum effect that will take time to settle." 

“There will undoubtably be winners and losers as a result of this change. The winners will be those with the capacity to write new business and those who can retain customers with competitive renewal pricing. Losers will struggle with capacity and may have to back out of the market temporarily." 

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