AM Best believes the recent changes to the UK’s personal injury discount rate (PIDR), also known as the Ogden Discount Rate, will positively impact the country’s non-life insurers.
The UK government announced an increase in the rate from -0.25% to 0.50%, which will become effective from January 11, 2025.
The PIDR is an important factor in calculating lump-sum compensation for personal injury claimants. It represents the assumed investment return a claimant could achieve, ensuring the lump sum is equivalent to affixed annual income over a set period.
“The rate is designed to consider the reasonable level of return that can be expected when investing the lump sum,” AM Best analysts explain.
Adding: “Its level can affect policyholder behaviour pertaining to the choice of lump sums or Periodic Payment Orders (PPOs), which are similar to annuity settlements but tailored towards large motor claims. With a higher discount rate, policyholders are less likely to choose lump sums.”
Given that real yields had been increasing through 2024, and taking into account that the UK consumer price index inflation is now broadly aligned with the 2% target, the general sentiment within the UK insurance industry was that there would be an upward revision of the rate to a range between 0% and 1%.
“The 75 basis point increase is welcome news for insurers,” the rating agency said. “This change should alleviate pressure on underwriting results in the highly competitive UK market.”
A key change in this review is the government’s shift to a multi-claimant model, considering “core claimant types” of varying ages, rather than relying on a single representative claimant.
Adopting multiple claimant types of 20, 40 and 60 years allowed the government to be aware of the impacts that different rates would have across a broad range of claimants.
The review process also considered the possibility of implementing dual or multiple rates, the report noted. However, this approach was not recommended because any potential advantages would likely be overshadowed by increased complexities and expenses associated with the claims process.
This decision is also expected to be welcomed by UK insurers, analysts stated.
AM Best views this rate change as positive for the insurance industry and will continue to monitor its impacts. The agency does not anticipate credit ratings to be affected.
