International financial services rating agency, Fitch Ratings, expects U.S. and Bermudian insurers and reinsurers to adapt quickly to higher costs as a result of the recent cut to the Ogden discount rate in the UK, but does advise firms to set aside extra reserves for their UK exposures.
The Ogden discount rate, which is used to calculate lump-sum payments for bodily injury claims, was cut to -0.75% earlier in 2017 in what was a surprise, steeper-than-anticipated cut from the previous 2.5% rate.
In response to the cut a number of insurers and reinsurers have announced increases to loss reserves to account for the change, but Fitch feels that the impact will only be a “short-term knock” to the earnings of U.S. and Bermuda re/insurers that cover bodily injury claims in the UK.
“However, the need to set aside extra reserves for U.K. risks adds to the pressure they are facing from declining reserve margins, low investment yields and competitive pricing,” said Fitch.
Fitch expects re/insurers to experience a one-off shock to earnings as they put aside extra reserves, highlighted by W. R. Berkley’s recently announced Q1 2017 reinsurance segment underwriting loss that the firm attributed, in part, to the Ogden rate cut.
For W. R. Berkley Fitch estimated an impact to its Q1 combined ratio of 2 percentage points, while Travelers, at the lower end of the combined ratio impact range, is estimated to experience just a 1 percentage point impact to its Q1 combined ratio from the cut. However, on the other end of the spectrum Fitch expects Markel and RenaissanceRe to experience an 8.9 percentage point and 8.5 percentage point combined ratio impact in Q1, respectively.
Fitch expects companies to be able to pass higher costs for new contracts to consumers via higher premiums, which, combined with higher claims costs caused by the rate cut will “largely flow to the reinsurance market, given insurers’ widespread use of excess-of-loss reinsurance with low limits to contain their exposure to U.K. bodily injury claims.”
As shown by Berkley’s Q1 2017 results and also the expected combined ratio impact of other insurers and reinsurers the Ogden rate cut is clearly going to impact firms that underwrite UK liability business, but that it will be only a short-term hit to earnings will be promising for firms to hear as they continue to grapple with a series of insurance and reinsurance industry headwinds.
