Brian BollenThe 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.
Mitigating steps
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.
On the other hand, setting the rate too low means that the accident victim is overcompensated, which has a knock-on effect on motor and other insurance premiums, and on the overall operating costs of the National Health Service.
Nelsonian wink?
After around 50 minutes of debate he finished by saying: “I am pleased to hear that there have been 135 responses to the consultation and that the Government are analysing them. I thought I got a slight Nelsonian wink that we might expect some developments.
“I hope very much that that assumption is correct, as we have to deal with this running sore. However, we can take it no further this evening, and I beg leave to withdraw my motion.” The motion was withdrawn and the House adjourned at 9.04pm.
MoJ consultation paper
A consultation paper issued by the Ministry of Justice in tandem with the Scottish government examined a number of core issues
- What principles should guide how the rate is set?
- Are the present principles still fit for purpose?
- What should the principles be?
- What investment returns should be taken into account in setting the rate?
- Should the possibility of a periodical payment order affect the decision as to the relevant investments?
- How often should the rate be set?
- Should this be left open, as now, or would a set pattern of review be better?
- Would an annual, three-year or five-year system be better?
- Should reviews be triggered by degrees of change in investment returns?
- Who should set the discount rate?
Scottish government building interior
A Welsh language version is available
Fundamentally flawed
James Dalton, director of general insurance policy at the ABI, said that it is now widely acknowledged that the current methodology is fundamentally flawed. It does not reflect the reality of how claimants invest their damages in practice, he said.
Retaining the status quo is not an option, he added. It is essential that the new government changes the framework to ensure we have a system that is fit for purpose for claimants, insurance-paying customers and compensators.
Dalton expressed a preference for replacing the current single rate with a ‘stepped’ dual rate.
This would see two rates for a single case to reflect different investment periods. It would take into account lower returns likely for claimants with short-term needs, while reflecting the higher returns that can be expected for claimants investing over a longer time horizon.
In Ontario
A similar system is in place in Ontario, Canada. For the first 15 years a short-term variable rate applies. This is updated annually to reflect returns on yields, with a fixed rate of 2.5% applying for any period over 15 years.
A panel of experts including insurers, claimant lawyer representatives, independent financial advisers and actuarial firms, should be set up to assist the relevant Secretary of State in setting the rate.
Not all insurers affected
Not all insurers are necessarily losing sleep at night. A spokesman for Prudential, for example, said: “I’m not sure Prudential is best placed to comment on this given our focus on pension saving, retirement income and life insurance in the UK.”
An Aviva spokesman said: “There was no specific mention made about Ogden in our latest interim results but we are glad the government are looking at it and we await their response to the consultation.”