Moody’s Investors Service said in a recent report that the Ogden rate cut could raise prices and demand for reinsurance, as insurers raise premiums in response to rising claims costs and prior year reserves see a one-off increase.
On February 27, the UK government announced a 325 basis points fall in the Ogden Rate to -0.75% – and although insurers and reinsurers had anticipated a rate drop, the dramatic rate decrease has left the industry reeling as it figures out an immediate response to protect profitability.
Assistant Vice President at Moody’s, Helena Kingsley-Tomkins, commented; “While we expect the long-term profit impact of the Ogden rate cut to be limited, it will create some additional pressure in the form of higher bodily injury claims costs, lower reserve releases and potentially higher reinsurance prices.”
Despite temporary profit-loss felt by UK motor insurers, the agency said it didn’t believe the rate cut would impact ratings or long-term industry profit although in the near-future, it’s expected UK motor re/insurers will see a reduction in reserve releases compounded by a significant rise in cost of claims.
The low Ogden rate is expected to push up bodily injury victims compensation awards, resulting in insurers looking to offset higher claims with increased premiums.
As the industry reacts to the Ogden rate drop, and insurers increase reserve premiums, carriers stand to lose out both from major earnings from future reserve releases from existing claims, and suffer from higher future claims costs.
This could mean challenging times ahead for the UK motor market, which totals a significant third of UK P&C insurance premiums, but according to Moody’s, has not generated an aggregate underwriting profit in the last nine years.
Moody’s says most re/insurers have been currently setting their reserves using a discount rate of 0.5% to 2.5%, and so will have to “revalue all unsettled large bodily injury claims in the light of the lower Ogden rate.”
Direct Line, Admiral, and Aviva, are insurers most vulnerable to profit loss, given their large UK motor market share, according to Moody’s.
But despite the temporary challenges imposed by the rate drop, Moody’s believes the industry will remain disciplined, passing extra costs on to policyholders.
As primary insurers face growing claims costs and look to rebalance their reserves, demand for reinsurance appears set to grow, and Moody’s said it believes reinsurers could in turn raise their prices as they too seek to compensate for additional passed-on risk.
In the short-term, the UK motor insurance industry appears set to experience a painful period of adjustment, with insurers and reinsurers issuing warnings of lower profit expectations, but most rating agencies have agreed so far that ratings for affected carriers are not likely to be impacted long-term.
Novae Group and Direct Line are among carriers who have already issued profit warnings, and could now be turning to reinsurance as they deal with the new requirements to increase compensation sums.
