Re/insurers Markel and Novae have released statements announcing a blow to 2016 profits and changes to reserve level strategies after being hit by the dramatic Ogden rate decrease.
Markel said as the company moves to rebalance its sheets in the first quarter of 2017, it expects to increase prior years’ loss reserves for its UK motor exposures run-off book to $85 million on a pre-tax basis.
The firm said it’ll be most affected by the rate decrease where it’s exposed to UK auto casualty claims through reinsurance contracts written in 2014 and prior years.
Markel had ceased writing new UK auto business in late 2014.
Novae’s Chief Executive Officer (CEO), Matthew Fosh, said the rate decrease smashed 2016 profits with a heavy reduction of nearly 60%. “The Lord Chancellor’s Ogden rate announcement, both in terms of timing and severity, has overshadowed our 2016 results. The resultant increases in reserves within our motor reinsurance and general liability classes have significantly eroded profits this year such that the Group reports a profit before tax of £23.7 million and a headline return on equity of 6.6%.”
The firm said it had expected profit before tax of £59.1 million with a 15.5% return on equity.
But in line with analyst predictions that the Ogden rate would not negatively impact the industry in the long-term, Fosh reassured that; “The Ogden change, while significant, has a one-off impact on the 2016 results and has no significant impact on the profitability of our ongoing business.”
Novae Chairman, John Hastings-Bass, further commented; “The Ogden change was considerably more severe than the industry expected leading the Association of British Insurers to describe the outcome as “crazy”. This has a one-off impact on our reserves and we must focus on returning the comfortable level of surplus that we have carried to date.”
The Ogden Rate is used to calculate lump sum awards in UK bodily injury cases, and from March 20th, will decrease from 2.5% to negative 0.75%.
The rate decrease means UK re/insurers are seeing a temporary blow to profits as they prepare to be hit with higher claims costs; these firms could turn increasingly towards reinsurance protection as they renegotiate reserve levels to address the Ogden rate decrease.
Industry experts have warned profitability may be affected for several years as insurers build on depleted reserve buffers and UK motor insurers appear set to face increased reinsurance costs.
