The impact of changes to the so-called Ogden rate on the commercial performance of UK insurance companies is beginning to be felt. Ageas made direct reference to the issue in its recent half-year results announcement.
The rate, formally known as the discount rate, is a figure used to help set compensation pay-outs when people suffer serious injuries, for example following a car crash or medical negligence. It has been reduced from 2.5% to -0.75%, effective from 20 March 2017.
Ageas quantified the impact as having cost €31m net in the first six months. It predicts it will cost it a further €10m-€15m in the second half.
Steps taken to mitigate the effect include an injection of €77m capital in the second quarter, a de-risking of the investment portfolio and stop loss reinsurance. Ageas says it restored its UK Solvency II figure to 131% from 100% at the end of December.
Richard Rowney, LV= group chief executive, said on the occasion of LV='s 2016 results in April: “The reduction in the Ogden discount rate has had a significant one-off impact on financial results as we have increased our reserves by £139m to reflect higher claims costs.
Steve Treloar, managing director of General Insurance at LV=, said: “The current discount rate mechanism is flawed so it’s absolutely right Government is looking to reform this.
Urgent change needed
“Urgent change needs to be delivered so that a new discount rate can be implemented, saving money for millions of drivers and businesses and helping younger and older drivers stay on the roads.
“We look forward to working closely with the Government on the consultation.”
Steve Treloar, courtesy of LV=
ABI blames change for premium increase
The Association of British Insurers (ABI) blamed the change for contributing to a rapid rise in average motor insurance premiums. It says they have gone up by 11%, around four times the rate of inflation.
Says Mohammad Khan, head of general insurance, PwC LLP: “The change to the Ogden rate has already had a significant impact on increasing motor insurance prices.
“If the Ogden discount rate mechanism does not change through the Government consultation then we will see further motor insurance price rises in November and December."
House of Lords debate
The ABI statistics were published on the day that the House of Lords debated the Government’s handling of its decision to cut the rate to the lowest level in any advanced economy.
Lord Hodgson of Astley Abbots, a member of the House of Lords Secondary Legislation Committee, tabled a Motion of Regret for debate following the Committee’s dismay at a lack of an impact assessment accompanying the change.
According to Hansard, the parliamentary record, he said: “My Lords, the regret Motion I have tabled may appear dry, complicated and technical. It is technical and complicated but it is not dry.
Practical everyday consequences
“It will have practical, everyday consequences for every taxpayer, for everybody who has an insurance policy, especially if they drive a motor car, and for every person who receives a long-term award of damages following an accident.”
On the one hand ,he said, the situation cannot be allowed where, because the discount rate has been set too high, someone who suffers a catastrophic injury finds that the lump sum runs out too soon.