Airmic says Ogden rate change to -0.25% will disappoint large commercial insurance buyers

This week’s change to the UK’s Ogden personal injury compensation rate has taken many by surprise and will disappoint large commercial insurance buyers, Airmic told CRE. It added its voice to those of insurers and other market players that warn the rate change to -0.25% from -0.75% is not enough to prevent overcompensation and will impact the cost of insurance. The UK’s Lord Chancellor’s department announced the Ogden rate change on Monday. The rate is applied by courts when large compensation sums are awarded, to adjust for investment returns. Following lobbying from insurers and other interested parties, a rate of between 0% and 1% was expected by many. Insurers said this would more realistically reflect how sums are invested by victims of personal injury claims. “The change will disappoint insurers, who will need to bolster their accounts, and larger commercial insurance buyers who may find cost increasing and existing cases going back to court – and all that entails for all parties,” Julia Graham, Airmic’s technical director and deputy CEO, told Commercial Risk Europe. “Nobody wants to see those entitled to compensation receive less than is fair – this is a fundamental principle of insurance. However, the apparent degree of certainty of the last two years has been replaced by a rate which will undoubtedly disappoint most, other than claimants,” she added. The Association of British Insurers (ABI) said the rate change is a “bad outcome” for insurers and insurance buyers. “A negative rate maintains the fiction that a claimant and their representatives will knowingly choose to invest their damages in a way that would guarantee losing them money,” said Huw Evans, director general of the ABI, earlier this week. “This will remain the lowest discount rate in the western world, leaving England and Wales an international outlier at a time when we need to boost our attraction to international capital,” he added. David Powell, head of non-marine underwriting at the Lloyd's Market Association, said: “The new rate will sustain the vast majority of reserving costs that were imposed on the insurance industry when the rate was previously changed from +2.5% to minus 0.75% in 2017. The highly competitive nature of our industry means that reductions in costs will quickly influence premiums. However, this positive but small change is unlikely to lead to substantial price reductions for policyholders." He added that the Lloyd’s market is “very disappointed” with the review. While the change is positive for compensators, such a “small movement” that retains a negative rate is “well below the level underwriters were expecting”, he continued. Mr Powell noted that the Lord Chancellor’s statement on the change made reference to a future consultation to explore setting a dual rate. “We will await this consultation with interest, as this route may be the only prospect in the short term that could provide some relief to motor and casualty insurance customers now facing sustained pressure on premiums,” he added. Dave Matcham, CEO of the International Underwriting Association, said the -0.25% rates leaves a claimant twice as likely to be overcompensated than undercompensated. “The likely effect will be to drive up the cost of insurance for policyholders across the market,” he added. Helena Kingsley-Tomkins, an AVP analyst at Moody’s Investors Service, said the change “falls short” of motor insurers’ expectations and is “credit negative”. “The less-than-expected increase will pressure earnings unless the sector can increase prices sufficiently to offset the future claims impact. The impact will vary by insurers, but those currently using discount rates above -0.25%, including Direct Line and Admiral, will face a one-off hit to earnings as they re-estimate up prior year claims reserves,” she said. Legal experts also said the Ogden revision is a “disappointment”. Charles Ashmore of DWF said today’s revision is at the “very lowest end of expectations” and still risks overcompensation. Andrew Hibbert, a partner at BLM, said his firm’s insurance clients expected that the new rate would be nearer +0.5%. It “was intended to be a more realistic and evidence-based way of valuing injury claims”, he added. Kate Duffy, a partner at law firm Clyde & Co, said that “-0.25% is a poor result”, adding: “Yes, it’s better than the proposed -0.75%, but it remains woefully inadequate. From the industry’s perspective, it tips the odds too much in favour of claimants at the expense of insurance-buying motorists and businesses, who will inevitably have to dig deeper for insurance costs,” she said. The Lord Chancellor’s office was heavily criticised when it unexpectedly slashed the Ogden rate from +2.5% to -0.75% in 2017. This caused insurers to set aside extra reserves to meet the additional costs of claims that weighed heavily on commercial buyers’ premiums. Since then, the government embedded reforms to the way the Ogden rate is set as part of the Civil Liability Act 2018, which combined with whiplash claims reforms to reduce claims in automotive incidents. The Act included a commitment to review the 2017 rate during 2019. The act also changed the calculation to a presumption of ‘low risk’ returns on invested lump sum awards rather than ‘very low risk’, raising hopes of a return to a positive rate. Lord Chancellor David Gauke said the new rate will take effect on 5 August 2019. Legal commentators said a dual rate was considered, but rejected at this stage without being ruled out in future. According to the Civil Liability Act, the rate should be reviewed at least every five years and in consultation with the government actuary, before an independent expert panel for subsequent reviews.

Airmic says Ogden rate change to -0.25% will disappoint large commercial insurance buyers

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