Material one-off Ogden rate cut hits reserves, profits but not ratings: Moody's
Motor re/insurers face a material one-off reserving hit due to the UK’s Ogden personal injury discount rate cut, hurting profitability, but ratings will remain unaffected, Moody's said.
The UK motor re/insurers will suffer a substantial one-off increase in prior year reserves, a long term reduction in reserve releases and a material rise in the future cost of claims as a result of the Ogden rate cut, said Moody's Investors Service.
The UK’s Lord Chancellor and Justice Secretary Elizabeth Truss has decided on February 27 to change the Ogden discount rate to -0.75 percent from 2.5 percent. The so-called Ogden tables are used to calculate compensation awards for serious personal injuries. The change exceeded the level expected by the industry.
According to analysis by broker Willis Towers Watson the Ogden rate change will cost the insurance industry, in particular reinsurers, a material one-off reserve charge of approximately £5.8 billion.
The motor market, which accounts for around one third of UK property/casualty insurance premiums, has not generated an aggregate underwriting profit in the last nine years, according to Moody's.
"While we expect the long-term profit impact of the Ogden rate cut to be limited, it will create some additional pressure in the form of higher bodily injury claims costs, lower reserve releases and potentially higher reinsurance prices," says Helena Kingsley-Tomkins, an assistant vice president at Moody's. The ratings agency believes the industry will respond by raising premiums and expects no ratings impact.
Higher premiums will help offset higher claims. The lower Ogden rate increases the present value of estimated future losses faced by bodily injury victims, pushing up their compensation awards. This raises the cost of future claims while reducing the scope for future reserve releases from existing claims, historically a major earnings contributor. Moody's considers that the market will remain disciplined and pass most of the extra costs on to policyholders through premium rate increases. However, reinsurers may also raise their prices, increasing costs for primary insurers.
The government's plan to hold a new consultation on the Ogden rate setting framework before Easter 2017 creates further uncertainty for insurers.
"While future decisions could reverse some of the adverse impact from the rate cut due to take effect on 20 March 2017, the prospect of further changes makes it more difficult for insurers to plan premium increases," said Kingsley-Tomkins.
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