Moody’s: insurers ‘will face a one-off hit to earnings’ after UK Ogden rate review
Moody’s Investors Service has warned that the Ogden discount rate of minus 0.25 percent, revealed today by the UK’s Lord Chancellor, will mean a “one-off hit to earnings” for reinsurers that have been working to expectations of a new rate between zero and 1 percent.
Helena Kingsley-Tomkins, AVP-Analyst at Moody’s Investors Service, said: “Today, the UK’s Justice Secretary announced that the Ogden rate, used to calculate serious bodily injury claim awards, will increase to minus 0.25 percent. This falls short of motor insurers’ expectations of a rate between zero and 1 percent and is credit negative.”
She said that the less-than-expected increase will “pressure earnings” unless the sector can increase prices sufficiently to offset the future claims impact.
“The impact will vary by insurers, but those currently using discount rates above minus 0.25 percent, including Direct Line and Admiral, will face a one-off hit to earnings as they re-estimate up prior year claims reserves,” Kingsley-Tomkins added.
The International Underwriting Association chief executive Dave Matcham agreed that the decision could drive up insurance prices for policyholders. “The new methodology for calculating the personal injury discount rate promised to introduce a much fairer and more realistic assessment of investment strategies," he said. “This was widely expected to result in a figure of between zero and 1 percent, which indeed, was the indication given by former Lord Chancellor David Liddington in a statement to the House of Commons in September 2017, when the process of reform began."
However, he added: "The government’s statement today indicates that a rate of minus 0.25 percent leaves a claimant twice as likely to be over-compensated than under-compensated.
“The likely effect will be to drive up the cost of insurance for policyholders across the market.”
Stuart Hanley, deputy head of legal services at Minister Law, broadly welcomed the “humane decision” from the UK Lord Chancellor, which he said would ensure critically injured people are properly funded, and that the principle of 100 percent compensation is maintained.
But he added: “Although a revised upwards rate at minus 0.25 percent will reduce compensation payments (previously minus 0.75 percent) the new rate does reflect the fact that the government accepts it is a risky and costly business for claimants to invest their compensation successfully to fully fund the enormous changes in their lives following serious injury.
“The revised rate also mirrors the likely outcome of the Damages Act in Scotland, where we understand the Scottish government is due to confirm a minus 0.25 percent rate, ensuring there is a level playing field across the UK.”
Matthew Maxwell Scott, executive director of Association of Consumer Support Organisations (ACSO), commented: “Since the financial crash, the discount rate for many years hugely favoured insurers at the expense of injured people.”
He called the Lord Chancellor’s rate decision “a sober assessment of the facts”, adding that regular reviews will ensure that the rate can be amended every five years to account for interest rates, investment returns and other economic data.
Maxwell Scott added: “It is of course vital that badly injured people get what the courts decide is due, and their funds are sufficient to enable them and their loved ones to get the best available care. In making his decision, the Lord Chancellor perhaps had in mind the risk of under settlement bringing significant future problems, including the potential risk that the state has to step in after the compensation runs out.
“The insurance industry is contracted to protect the public in the event of a serious injury, in return for which motor and many other insurances are compulsory. The discount rate must always reflect that contract, and meet the obligations of insurers to look after injured people, whatever the cost.”
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