The result of the UK Government’s first review of the Ogden Discount Rate (Discount Rate) falls short of market expectations and is not expected to have a significant impact on the capital of UK insurers, according to AM Best.
The rating agency said the revision of the rate from negative 0.75% to negative 0.25% will lead to reserve strengthening for companies which had booked motor and liability reserves in the 0-1% range, but will otherwise have little effect.
The re/insurance industry has expressed its disappointment following the review, which had been expected result in a rate change of between 0% and 1%.
The rate is used to determine how much money insurers should pay as compensation to people who have suffered life-changing injuries. The lower the rate, the larger the sum insurers have to pay on personal injury claims, as it assumes lower annual investment returns for that amount.
Following a cut by then-Lord Chancellor Liz Truss in 2017 from 2.5% to negative 0.75%, motor insurers in the UK expressed their concern, leading to a government consultation on how the rate is calculated.
AM Best noted that, while some companies are currently reserved conservatively, based on a discount rate of negative 0.75%, others have been taking a more speculative approach and have been reserving at a rate of 0-1%.
Consequently, analysts believe the announcement may lead to reserve releases or reserve strengthening depending on each individual company’s current assumptions.
“Overall, insurers will be disappointed that the change did not meet industry expectations and policyholders are unlikely to see meaningful motor or liability premium reductions in the near future,” AM Best stated.
“The alteration is likely to have a minor one-off earnings impact on some companies through strengthening or release of reserves,” it added. “However, AM Best does not expect it to have a material impact on the capitalisation or credit ratings of UK insurers.”
