UK motor insurers and reinsurers are expected to experience the greatest impact from the Ogden discount rate cut to -0.75% by the UK government, a move that A.M. Best expects to drive a high reserve charge for re/insurers and further pressure a market that struggles for profitability.
International rating agency A.M. Best believed that the UK motor insurance industry was starting to improve on the back of recent reforms and proposals, despite combined ratios of above 100% and the industry failing to record an underwriting profit in any of the last five years.
However, the recent cut to the Ogden discount rate, which although expected was far steeper than most in the marketplace anticipated, is expected to mitigate any improvement in loss experience as a result of the reforms, and A.M. Best expects the new -0.75% rate to drive market pressure in 2017, particularly during the first-quarter of the year.
During Q1 2017 A.M. Best expects combined ratios for the motor industry to far exceed 100%, and the firm anticipates another full-year underwriting loss to be experienced, “in spite of material premium rate increases.”
The severity of the rate cut appears to have been a surprise for many UK motor insurers and reinsurers, with a number of companies already announcing the impact they expect from the rate decline.
“The discount rate change will most notably affect insurers and reinsurers with exposure to U.K. motor business, but other liability classes in the U.K. where bodily injury liability arises will also be affected. A.M. Best expects exposed companies to make a one-off reserve charge for claims relating to business already underwritten and to assume higher claims costs when reserving for future business,” said A.M. Best, in a recent briefing on the Ogden rate change.
In fact, the rating agency said that it expects the reserve strengthening of motor insurers and reinsurers to cost more than £5 billion (US$6.2 billion) based on initial industry estimates. Reinsurancene.ws noted previously that insurance and reinsurance broker Willis Towers Watson expected the rate change to result in a £4.9 billion reserve charge.
While Fitch Ratings warned that the steep reduction would lead to higher reinsurance costs for UK motor insurers and ultimately lower profit expectations in the months ahead.
“A.M. Best notes that the implications of the discount rate cut for U.K. insurers’ earnings and balance sheet strength is difficult to uniformly quantify, given the varying levels of reinsurance protection and exposure to motor business seen across the market,” continued A.M. Best.
Overall, the rate cut doesn’t bode well for an industry already struggling to achieve underwriting profits as a result of inadequate pricing and fairly poor claims experience. However, A.M. Best does not feel that the change to the Ogden rate will directly result in any rating actions, owing to the strong diversification of rated insurers with motor exposures in the UK.
In response to the rate change and to limit the negative impacts, “A.M. Best expects the market to impose premium rate hikes and higher deductibles across the segment with immediate effect, affecting both personal and commercial policies and regardless of whether the level of coverage is comprehensive or third-party only.”
