Liz Truss, the Lord Chancellor and Justice Secretary, has announced a steeper than expected cut to the Ogden discount rate from 2.5% to -0.75%, in a move that has already caused some insurers and reinsurers to warn of lower profit expectations.
“The law is absolutely clear – as Lord Chancellor, I must make sure the right rate is set to compensate claimants. I am clear that this is the only legally acceptable rate I can set,” said Truss.
The adjustment of the discount rate to negative means insurers will be required to increase their compensation sums where previously there was a reduction, and Novae Group and Direct Line have already issued profit warnings in response to the rate cut.
Reinsurancene.ws discussed previously that analysts at Berenberg expected the utilisation of reinsurance capacity to limit the effect of the discount rate reduction, although analysts had predicted the rate 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.
Unchanged since 2001 the Ministry of Justice has said that it accepts that the steep reduction will have a substantial impact on the UK insurance industry, and could even have knock-on effects for public services, such as the already strained NHS.
The Association of British Insurers (ABI) described the announcement as a “crazy decision,” highlighting that it would result in higher insurance premiums.
Many UK motor insurers have already opted for proactive protection from any decrease to the Ogden discount rate, but the rate of decline appears to have been a surprise for many in the industry. However, it could lead to a rise in reinsurance demand as insurers look to reinsurance for ways to mitigate the impact, particularly on long-tail risk exposure.
Insurance and reinsurance broker Willis Towers Watson also discussed the rate revision before the official announcement. Stating that a revision of the rate to -0.5% would likely result in a reserve charge for UK motor industry reinsurers of £4.9 billion, and that the annual cost of providing motor insurance would increase. So a rate of -0.75% suggests an even higher reserve charge for reinsurers and an even more expensive annual bill for providing motor insurance.