UK motor insurers will likely face increased reinsurance costs after the government announced plans to reduce the Ogden discount rate from 2.5% to -0.75%, Fitch Ratings has warned.
Although re/insurers likely to be affected by the rate have been proactive in preparing for the rate change, a drop to a negative rate has exceeded what most industry players had anticipated, and according to rating agency Fitch, profitability may be affected for several years as insurers build on depleted reserve buffers.
“The increase in bodily injury claim settlements caused by the Ogden discount rate cut is likely to increase demand for excess-of-loss reinsurance as firms attempt to reduce their exposure to individual large claims. Higher claims experience on primary insurance will be reflected in higher reinsurance costs, which will increase upward pressure on motor insurance prices,” said Fitch.
However, the rating agency believes re/insurers’ credit ratings won’t be affected by any significant long-term deterioration as firms are expected to pass on higher costs to consumers.
Some re/insurers could be protected from potential losses as they had already set aside reserves for a lower interest rate than the 2.5%, although, Fitch says “we do not believe any had anticipated the size of rate reduction and they will therefore need to divert further earnings to strengthen reserves.”
After Liz Truss, the Lord Chancellor and Justice Secretary, announced the steeper than expected cut to the Ogden discount rate yesterday some insurers and reinsurers have been warning of lower profit expectations.
Reinsurancene.ws previously reported Berenberg analyst’s prediction that the utilisation of reinsurance capacity to limit the effect of the discount rate reduction, although the predicted rate was expected to be revised to 1.5% to 2%, and not the negative 0.75% reported today.
Novae Group warned that owing to its exposure to motor reinsurance business it expects the rate adjustment to impact its full-year 2016 profit, and has deferred its results announcement in response.
While Direct Line announced that it expects its full-year 2016 profit before tax to decline by between £215 million and £230 million, after reinsurance recoveries.