LONDON--(BUSINESS WIRE)--A.M. Best expects the earnings of U.K. insurers to 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.
Motor insurers and reinsurers will bear the brunt of the impact, but writers of other liability lines will also be affected. The change likely is to offset the positive effect on claims costs of recent whiplash reforms and result in material rate increases in the motor sector.
A.M. Best has published its findings in a briefing titled, “Reserve Strengthening to Follow U.K. Personal Injury Discount Rate Change.” The research comes after the U.K. government’s 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 27 February 2017, the government announced a cut in the rate from 2.5% to minus 0.75%, which will take effect from 20 March 2017 and exceeded the level anticipated by the industry.
The briefing says the shift in the Ogden rate is a clear negative for the short-term earnings and capitalisation of U.K. insurers, particularly those with large motor portfolios. Companies are expected to strengthen reserves for bodily injury claims and adapt their pricing strategies in an attempt to offset deterioration in loss experience.
Catherine Thomas, senior director of analytics, 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. 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. 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.”
The briefing says other liability classes in the United Kingdom where bodily injury liability arises will also be affected. A.M. Best expects 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.
Myles Gould, senior financial analyst, said: “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. 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. 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 focussed on U.K. motor business, the Ogden rate cut is likely to have earnings and capital implications. 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.
To access a complimentary copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=259155.
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