UK personal injury rate change to particularly hit reinsurers
The magnitude of the UK’s reduction of the personal injury rate has shocked the UK insurance industry and raised concerns also among reinsurers, which are expected to be particularly hard hit.
“This has been incredibly badly handled,” said Richard Pryce, CEO of QBE Europe at a 27 Feb. press briefing in London.
“To have something major as this going on at results time makes it almost untenable for some companies. You’ve seen people delaying results. […] It was almost thrown at us in the last minute,” Pryce said. “It just doesn’t give a good look to the UK economy from outside,” he noted.
The UK’s Lord Chancellor and Justice Secretary Elizabeth Truss has 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.
QBE took an assessment on a rate of 1.5 percent, and Pryce suggested that no one expected it to go to -0.75 percent. Now the business will need to be repriced.
Dave Matcham, CEO of the International Underwriting Association (IUA), commented in a written statement: “Inevitably, premiums will be under significant pressure for businesses and consumers across the UK.”
“The discount rate has not been reviewed for some time. Many IUA members have therefore acted prudently and have already planned for some reduction within their business models. The scale of the cut announced by the Lord Chancellor, however, is far beyond general industry expectations and clearly demonstrates a need for urgent reform to this process.”
Due to the change in the discount rate Britain's largest motor insurer Direct Line Insurance Group expects its pre-tax profit to fall between £215 million and £230 million pounds after reinsurance recoveries, according to a Reuters news report.
The Ogden rate decision will not only impact the major motor companies in the UK, but the reinsurance world, because motor insurers spread their risk globally and that’s going to have a wider impact, Pryce said. The new rate applies to past and future business.
According to analysis by Willis Towers Watson, a broker, the Ogden rate change will cost the insurance industry, in particular the reinsurers of this market, a material one-off reserve charge of approximately £5.8 billion. In addition, there would be a roughly £850 million per annum increase in the cost of providing motor insurance in the future.
Stephen Jones, a director at Willis Towers Watson, said: “The immediate impact of such an aggressive cut is going to be painful for both drivers and insurers. Reserves for past claims that have not yet been paid will have to rise, while the costs of future claims will also go up.”
The broker expects UK motorists will be required to fund the cost of this change to the tune of between £25 and £65 per policy per year depending on the speed at which the motor insurance industry looks to re-establish its balance sheet strength.
“Looking beyond today’s decision, we would strongly recommend 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 so that we do not find ourselves in a similarly difficult position in the future,” said Jones.
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