Ogden change will mean one-off shock to profits for reinsurers

Re/insurers in Bermuda and the US that cover bodily injury claims in the UK will adapt quickly to the higher costs stemming from a change in how settlements are calculated, with just a short-term knock to their earnings, according to a report by Fitch Ratings.

However, the need to set aside extra reserves for UK risks adds to the pressure they are facing from declining reserve margins, low investment yields and competitive pricing.

In February the UK government decided 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, with motor insurers and reinsurers expected to bear the brunt of the impact.

According to Fitch, firms that write or reinsure UK liability business face larger claims following the change. However, Fitch stated that they should be able to pass the higher costs for new contracts to their clients by raising premium rates, and that Fitch therefore does not expect any significant long-term deterioration in their credit profiles.

The rating agency said that insurers and reinsurers will suffer a one-off shock to profits when they set aside the extra reserves needed for contracts that were in force before the change was announced, in anticipation of higher payments for claims yet to be incurred, reported or settled. Several US and Bermuda companies have recently clarified their exposures, with impacts varying significantly according to geographic and business mix.

Fitch added that the extra claim costs and associated premium increase caused by the Ogden discount rate cut will largely flow to the reinsurance market, given insurers' widespread use of excess-of-loss reinsurance with low limits to contain their exposure to UK bodily injury claims.

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