The earnings of U.K. insurers likely will be hit by reserve strengthening following the U.K. government’s announcement of a dramatic cut to the discount rate used to calculate lump-sum personal injury compensation, according to A.M. Best.
Motor insurers and reinsurers will bear the brunt of the impact, but writers of other liability lines will also be affected, said A.M. Best in a briefing titled “Reserve Strengthening to Follow U.K. Personal Injury Discount Rate Change.”
A.M. Best’s research responds to the U.K. government’s recent review of the Ogden rate – the discount rate used in the calculation of lump-sum settlements awarded by U.K. courts for bodily injury claims.
On Feb. 27, 2017, the government announced a cut in the rate from 2.5 percent to minus 0.75 percent, which will take effect from March 20, 2017, said A.M. Best, noting that it exceeded the level anticipated by the industry.
The shift in the Ogden rate “is a clear negative for the short-term earnings and capitalization of U.K. insurers, particularly those with large motor portfolios,” said the A.M. Best briefing. “Companies are expected to strengthen reserves for bodily injury claims and adapt their pricing strategies in an attempt to offset deterioration in loss experience.”
The briefing said that other U.K. liability classes with bodily injury liability exposures also will be affected.
As a result, A.M. Best expected that exposed companies to make a one-off reserve charge for claims relating to business already underwritten and to assume higher claims costs when reserving for future business.
The rate change is likely to offset the positive effect of recent U.K. whiplash reforms on claims costs and will result in material rate increases in the motor sector,” A.M. Best said.
“Whilst most U.K. motor market participants were anticipating a fall in the discount rate, given the reduction in interest rates since 2001, the extent of the decline has been far more severe than expected,” said Catherine Thomas, senior director of analytics.
“Earnings for U.K. motor insurers for the first quarter of 2017 are expected to form a pretty bleak picture, with reserve strengthening for most insurers likely to hit this financial period,” she added. “Higher losses will put further pressure on the motor segment, which already has a track record of weak performance due to inadequate pricing and poor claims experience.”
“A.M. Best expects the market to impose premium rate hikes and higher deductibles across the segment with immediate effect, affecting personal and commercial policies regardless of whether the level of coverage is comprehensive or third-party only,” said Myles Gould, senior financial analyst.
“In addition, it is likely that higher risk customer segments, such as the under 25s and over 75s, will experience even greater premium hikes at renewal,” he added. “Double-digit percentage increases in renewal premiums for many could result as insurers seek to pass on to consumers the impact of higher claims costs and rises in insurance premium tax.”
For companies with portfolios focused on U.K. motor business, the Ogden rate cut is likely to have earnings and capital implications, the ratings agency said.
However, A.M. Best does not expect to take any rating actions as a direct consequence of the change, as rated insurers exposed to U.K. motor claims tend to be well diversified by geography and business line.
Source: A.M. Best
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