It has been announced by the UK’s Ministry of Justice that the Personal Injury Discount (Ogden) Rate will be set at -0.25, dealing a modest blow to motor insurers who had banked on a rate change to between 0% and 1%.
The rate is used to determine how much money insurers should pay as compensation to people who have suffered life-changing injuries. The lower the rate, the larger the sum insurers have to pay on personal injury claims, as it assumes lower annual investment returns for that amount.
Following a cut by then-Lord Chancellor Liz Truss in 2017 to -0.75%, motor insurers in the UK expressed their concern, leading to a government consultation on how the rate is calculated.
Reforms to the Ogden rate were supported widely across the UK re/insurance sector, and in early 2018, the UK Ministry of Justice announced plans to introduce the Civil Liability Bill into the House of Lords, designed to address needed reforms to both the Ogden discount rate and whiplash claims.
Now, as a result of this change, there’s an exception among analysts that motor insurers will need to modestly strengthen reserves, and that any expectation for special Ogden releases or capital returns should be cancelled.
Many insurers moved their reserving assumption to a 0% rate at FY18 results, and therefore will now need to move to an assumption of -0.25%. Analysts see this as a small negative surprise for the industry.
JP Morgan analysts also foresee a small positive impact on pricing as a result of the change, as insurers look to pass on costs to the end customer.
Companies most sensitive to these changes, in JP Morgan’s view, are Admiral, followed by Direct Line. Hastings and Saga should be less affected.
Martin Milliner, general insurance claims director at LV, commented that today’s announcement, whilst replacing the “absurd and fiscally irresponsible” decision to cut the Ogden discount rate to -0.75 per cent, doesn’t in his view go far enough.
“At this level we believe that claimants will remain overcompensated, thus undermining the common law principle of 100 per cent compensation,” he said.
Andrew Hibbert, partner and head of the catastrophic injury team at BLM, added “The newly-announced rate was intended to be a more realistic and evidence-based way of valuing injury claims with significant future losses.
“We haven’t yet seen the reasons for the decision, but the new minus 0.25% rate is a disappointment to us and our insurance clients since we’ve very recently been settling cases at plus 0.5% and above – we’d hoped the new rate would be around that number.”
Hibbert is doubtful that this new rate removes the risk of over-compensation which the government itself said was significant at the previous rate of -0.75%.
“The more positive aspect is that the setting of the discount rate should at least remove uncertainties associated with resolving claims and should help bring cases to a close more quickly.”
Meanwhile, Kate Duffy, partner with global law firm Clyde & Co, remarked, “This news has wiped the smile off the face of the many insurance actuaries still celebrating England’s cricket win yesterday. -0.25% is a poor result.”
“Yes, it’s better than the proposed -0.75%, but it remains woefully inadequate. From the industry’s perspective, it tips the odds too much in favour of claimants at the expense of insurance-buying motorists and businesses, who will inevitably have to dig deeper for insurance costs.”