The British Insurance Brokers’ Association (BIBA) has highlighted needed amendments in the law to set the Ogden rate in the UK, which was recently cut to -0.75%, and called for the government to consult experts when considering future rate changes.
Since the Ogden discount rate was cut from 2.5% to -0.75% in the UK earlier in 2017, a number of insurers, reinsurers, and other insurance sector service providers and organisations have commented on the steeper-than-anticipated rate change.
The International Underwriting Association (IUA) proposed reforms back in March, and now BIBA has followed suit and like the IUA, has called for the government to seek advice from industry experts, and to consult with representatives of specified claimants and defendants groups when considering changing the rate.
This practice, says BIBA, would result in fairer and more appropriate rate adjustments.
BIBA also underlines a number of problems with the existing law to set the Ogden rate, which includes a heightened risk of underinsurance in liability classes of business. The existing law also means insures must, and with little warning to react, adapt their reserving models which results in increases to claims reserves, as has been seen since the most recent rate adjustment.
Furthermore, the current law adds pressure on customers’ premiums as a result of the expected increases in claims, and BIBA also warns of issues surrounding reduced capacity in the motor insurance market.
BIBA Executive Director, Graeme Trudgill, said; “We want claimants to receive fair and just compensation which needs to take into account equitable investment opportunities. It is unlikely that many individuals would seek, or be advised to seek, to invest all of their lump sum payments in index-linked gilts. We believe it is very unlikely that a prudent investor with appropriate advice would receive a negative return on investment.
“Using a deviation against a pre-agreed norm of a basket of low-risk mixed portfolio investments to trigger reviews may present better way of keeping the discount rate current with transitional arrangements to avoid swings in claims adjustment.”
BIBA recommends that owing to the potential implications and issues with the current law related to the Ogden discount rate, the law should be amended to provide greater certainty moving forward.
