Reinsurance News

Ogden rate revision to result in huge re/insurer reserve charge: Willis

20th February 2017 - Author: Luke Gallin

Insurance and reinsurance broker Willis Towers Watson (WTW) has warned that should the proposed Ogden discount rate revision to negative 0.5% occur, reinsurers that operate in the UK motor industry would most likely face a £4.9 billion reserve charge, while the annual cost of providing motor insurance would also increase.

Analysis by the firm states that were the Lord Chancellor to approve the rate revision from 2.5% to negative 0.5%, the resulting £4.9 billion material, one-off reserve charge suffered by the industry’s reinsurance companies would see a fair share of the cost be borne by consumers, says WTW.

This is due to the size of the £4.9 billion charge relative to current reserve margins, which are thinning, capital requirements and also the challenging dynamics of today’s insurance and reinsurance sector, explains WTW.

The broker expects that UK motorists will, should the revision go ahead, be required to fund the charge to the tune of between £20 and £55 per policy per year, though this will depend on how fast the motor insurance industry in the UK aims to “re-establish its balance sheet strength,” said WTW.

As a result, it appears unlikely that motor insurance is going to get cheaper anytime soon with rates up around 14% last year and perhaps a further increase of between 13% and 19% during 2017 if the response by insurers to such an outcome were to be added to underlying inflationary effects,” said Stephen Jones, a Director at the WTW.

Tremor - The modern way to place reinsurance discussed early this month that analysts at Berenberg believed that reinsurance is expected to limit the impact of potential rate changes to the Ogden discount rate, with Berenberg analysts expecting a rate reduction to 1.5% to 2%.

A number of UK motor insurers have already chosen to take proactive protection against any potential rate revision, including Direct Line, which today announced that it sees less impact from the rate change put forward by the Association of Personal Injury Lawyers (APIL), and already applies a rate of 1.5%.

Should the rate change become effective, it could be that more motor insurers look to reinsurance protection to mitigate the exposure, especially for long-tail lines of business.

“Instead of being reviewed and updated on a regular basis to ensure compensation remains fair reflecting prevailing economic conditions, the Ogden rate has been left unchanged for 16 years. As a consequence, pressure has been building and appears to have reached a politically unsustainable level. The immediate impact of trying to defuse this pressure now will be painful in the short term as reserves for past claims that have yet been paid would have to rise, while the costs of future claims would also go up.

“We are living in fairly interesting political and economic times. The government has put themselves in a difficult position having committed to providing an opinion with the markets in such a state of short-term flux. An opinion which could easily need to be reversed in a year or two’s time,” said, Andy Staudt, a Director at WTW.

According to analysis from the insurance and reinsurance brokerage, revising the discount rate to 1% would result in a one-off reserve charge impact of £1.7 billion, and the annual cost of providing motor insurance would be roughly £200 million, compared with approximately £700 million under the negative 0.5% discount rate proposal.

This suggests that motorists would pay increases of between £5 and £20 per policy per year, so some way lower than the expected cost as the result of the negative 0.5% rate, proposed by the APIL.

“Whatever the government decides in the next week, perhaps the key lesson is that this rate should be either regularly reviewed and revised or pegged to an independent economic indicator so that we do not find ourselves in a similar position in the future – a pressure cooker waiting to blow,” concluded Staudt.

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