Vast majority in re/insurance wants UK’s Ogden discount rate calculation to change: survey

13-03-2017

Vast majority in re/insurance wants UK’s Ogden discount rate calculation to change: survey

CasPhotography / istockphoto.com

Most (84 percent) of participants in an Intelligent Insurer survey want the way the personal injury Ogden discount rate is being calculated in the UK to change.

UK’s Chancellor Philip Hammond has announced a consultation on the framework for setting future personal injury (Ogden) rates.

The consultation will consider whether there is a better or fairer framework for claimants and defendants. Options for reform to be considered include whether the rate should in future be set by an independent body; whether more frequent reviews would improve predictability and certainty for all parties; and whether the methodology is appropriate for the future, according to the Ministry of Justice.

The UK Government startled the re/insurance industry on February 27 by decreasing the personal injury (Ogden) rate by far more than had been expected, causing companies to revise their profit results mid-reporting season.

The Ministry of Justice cut the discount rate used to calculate the compensation in large motor and liability bodily injury claims from 2.5 percent to -0.75 percent, effective from March 20, to reflect the lower real risk-free returns available on the UK index-linked government securities.

Currently, the Ogden discount rate level is linked in law to returns on the lowest risk investments, typically index/linked gilts. When personal injury lawyers calculate how much a claimant should receive the law at present assumes that he or she will be able to invest that sum in low risk stock and receive a certain real and net annual rate of return.

The law states that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on the 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.

But re/insurance executives believe that there are more appropriate ways to achieve to calculate a fair compensation and disagree that the compensation should be based on the assumption that the funds will be invested at the lowest available investment returns.

“It is simply wrong to base the calculation on an assumption that claimants awarded a lump sum will invest in just the lowest risk investments,” a reader participating in the Intelligent Insurer survey commented.

“The discount rate should reflect realistic returns made by claimants. Index-linked gilts are no longer a reliable means of measuring inflation,” another reader observed.

Danielle Stokes, claims handler at Tokio Millennium Re suggested that a more sophisticated modelling should be applied to calculate the discount rate and estimate future investment returns and not just yields. It could, for example, include other investment income methods, economic forecasting and social forecasting, Stokes notes. It might also make sense to have different discount rates for different lengths of future losses, she added.

Another reader wanted to take into consideration the actual Investment behaviour focusing on mixed investments and returns achieved by professional investment companies. “If a claimant truly wants to hedge the longevity risk, they should go down the PPO [periodical payment orders] route anyway.” A PPO allows for a series of regular payments over the remainder of the claimant’s lifetime as opposed to a single lump sum.

The basis of the discount rate should be in line with the long-term investment strategy of investment funds, a reader comments. “Negative discount rates are a very unrealistic assumption even for conservative investors as every rational and conservative thinking person would rather not invest at all before losing money on a nominal basis by investing it into a paper with negative interest.”

“The personal injury discount rate should be based on a real risk free rate of return with a floor,” another reader suggested. “It should take into account future inflation but also consider the logical impacts of rising inflation rates. The long term expectation of future interest rates should be built in.”

Willis Towers Watsons had previously recommended that the Ogden rate, which until now had been left unchanged for 16 years, should be either regularly reviewed and revised or pegged to an independent economic indicator.

Several readers agreed that the a review of the rate should happen more regularly. In addition, the new rate should only apply to losses which occur on or after the change announcement, another reader said.

Ogden, Consultation, Survey, Philip Hammond, Willis Towers Watsons,

Intelligent Insurer