Analysts at Fitch Ratings believe that US and Bermuda re/insurers that cover bodily injury claims in the UK will adapt quickly to higher costs stemming from a change in how settlements are calculated, with just a short-term knock to their earnings.
However, the need to set aside extra reserves for UK risks adds to the pressure they are facing from declining reserve margins, low investment yields and competitive pricing, Fitch added.
The rating agency notes that firms writing or reinsuring UK liability business will face larger claims following a cut in the Ogden discount rate, which is used to calculate lump-sum payments in bodily injury claims to cover long-term care costs or lost earnings.
But it is expected that they should be able to pass the higher costs for new contracts to their clients by raising premium rates, and will not therefore suffer any significant long-term deterioration in credit profiles.
“Insurers and reinsurers will suffer a one-off shock to profits when they set aside the extra reserves needed for contracts that were in force before the change was announced, in anticipation of higher payments for claims yet to be incurred, reported or settled,” Fitch noted.
“The extra claim costs and associated premium increases caused by the Ogden discount 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.”
The Ogden rate was cut to -0.75% from 2.5%, from March 20, 2017, to reflect lower risk-free returns in the U.K. economy in recent years.
Some firms had already set aside reserves to compensate for an interest rate lower than 2.5%, but Fitch does not believe any had anticipated such an extreme rate reduction.
Reducing the rate has significant implications for motor insurers in the UK because bodily injury claims represent around half of total motor insurance claims costs.