EY has estimated the overall Odgen rate change cost to insurers and reinsurers at £3.5 billion in 2016, contributing to a predicted motor premium rate increase of 9% this year.
Approximately £2.4 billion of losses have been publicly disclosed to date, following the rate change.
Tony Sault, UK General Insurance Market Lead at EY, commented; “The impact of the Ogden rate change to the motor insurance industry has been considerable at around £3.5bn.
“While a reduction was certainly on the cards, virtually no-one anticipated the extent of the drop.
“The general election result last week may have created additional uncertainty and insurers will be hoping that the Ogden consultation and reform of whiplash claims will remain priorities for the new Lord Chancellor and the Government.”
Following a 100.5% Net Combined Ratio (NCR) in 2015, there was a sharp fall to 109.0% NCR in 2016 after the review of the Ogden discount rate for personal injury claims, said EY.
The Association of British Insurers said consumer rates were already at record highs in the first quarter this year at £462, and a 9% rate increase would see this figure could shoot up to reach £503, hitting the pockets of young drivers the hardest.
In addition to Ogden rate changes, high repair cost inflation and the rise in insurance premium tax to 12% are factors driving insurers to pass the extra costs on to policyholders.
Sault continued; “the impact of the Ogden rate change, together with the increasing cost of repairing ever more complex cars, will inevitably filter through to premium rates.
“For Ogden alone, the higher compensation now due for serious injuries means insurers will have to pay out around 9% more in future claims. This will translate into a £28 increase to the average cost of a comprehensive policy.
“Further effects will be felt next year when annual reinsurance cover for large claims come up for renewal. Young drivers will undoubtedly have to bear the brunt of the increase due to the disproportionate number of larger claims they cause.
“A fundamental review of Ogden and the Government’s proposed whiplash reforms are increasingly urgent for consumers and must not be abandoned in the aftermath of the general election.”
EY Partner and UK Insurance Leader, Rodney Bonnard, predicts that car registrations in 2017 will fall back 5% from last year’s record high of 2.68 million.
Non-life premium growth is expected to decelerate to 2.3% this year and 1.5% in 2018 due to pressure on real incomes.
However, increasing long-term interest rates will offset some of these challenges, said Bonnard, “with the 10-year gilt yield to average 2.6% until 2020, up from a post-EU vote low of 1.25%.”