Despite UK motor insurers taking a hit to reserves after the stark reduction in the personal injury discount rate and this negatively impacting 2016 results, the UK non-life market remains well capitalised, according to A.M. Best’s latest market report.
Many insurers had been preparing for a lower rate in their reserving strategies, but had not anticipated the Ogden rate drop into negative territory from 2.5% to minus 0.75% in February.
The motor insurance industry responded with significant rate increases, and further upward rate movement had been expected when excess of loss reinsurance programmes renewed in January.
Most exposed companies had been assuming higher claims costs when reserving for third-party liability business written in 2017.
However, the Ministry of Justice released draft legislation in September that proposes to reform the law governing the way the rate is set.
The proposed changes include setting by reference to expected rates of return on a “low risk” diversified portfolio of investments rather than “very low risk” investments as is assumed in the minus 0.75% rate.
It’s expected the rate is due to be reviewed shortly after the legislation comes into force and, thereafter, at least every three years.
The proposed reforms, if implemented will likely lead to reserve releases for UK motor insurers and a resultant improvement in earnings will likely stall the upward price momentum in this fiercely competitive sector.
“The government stated in its announcement that if a single rate were set today under the new approach it would expect the real rate to lie within the range of 0% to 1%,” said A.M. Best.
Reforms to whiplash personal injury compensation, outlined in the Civil Liability Bill in the Queen’s speech in June 2017, should also reduce claims costs for motor insurers.
Persisting low-interest rates mean investments will likely provide only marginal support to 2017’s overall earnings for the UK non-life sector.
However, other lines of the business in the UK non-life sector have shown positive developments this year, with the UK property sector benefitting from the absence of large flood and storm losses.
In the liability sector, there are signs that the number of claims for noise-induced hearing loss, which have risen rapidly in recent years, are beginning to fall, the rating agency noted.
UK insurers have shown a general trend of pursuing defensive investment strategies, with a focus on capital preservation, A.M. Best explained that as firms seek higher returns “some continue to modestly increase their allocation to equities and lower-rated corporate bonds, but low-risk assets, such as cash deposits and high-quality fixed income securities, still dominate portfolios.”
