Tim Holliday analyses what the effect of the recent change in the Ogden rate to minus 0.75% will be for insurers and reinsurers, as well as what it could mean for brokers.
It hardly ranks alongside JFK being shot but I can remember exactly where I was when the Ogden discount rate was first set, at 2.5%, in 2001.
I was sat behind a PC trying to work out what the impact would be on prices and reserves. If I recall correctly my calculation was: ‘not much’. Basically the news was enough to make it a bad day in the office but not enough to make it a bad year. Thankfully my numbers weren’t too far off and I think everyone would agree that the world moved on pretty quickly.
The change this year from to 2.5% to minus 0.75% feels very different. Not just because the monetary impact is much greater but also because of the uncertainty it introduces to the market – a market which is very different to the way it was in 2001.
Unsurprisingly price rises have grabbed the headlines. For motor, the price increase required at a gross loss should be pretty much the same for all insurers. What makes a difference is the impact of reinsurance. A large insurer might well buy motor excess of loss insurance with a deductible of £10m or more; a small mono-line motor insurer might take a £500,000 deductible. The former carries the full impact from day one, and has to put prices up immediately. If the small player was lucky enough to renew their reinsurance on 1 January without Ogden being reflected they’ve got the rest of the year to fill their boots at a lower rate before having to worry about 2018. All this while the reinsurer curses his or her luck and prays for no large claims.
Rates will have to go up – the impact might take some time to work its way around the whole market but all providers will be affected in the endTim Holliday
In terms of reserves the impact can vary. But it is instant and will need to come out of profits or capital reserves. Some insurers won’t even notice it while some might have to bring in capital from overseas owners. For others, already operating under tighter capital constraints post-Solvency II, it might not be so easy. They might need to cut back on new business volumes – or even exit some areas entirely.
And what about future appetite and capacity? For those providers sitting on the sidelines waiting for the right moment to enter, or re-enter, the UK motor market – the picture just got a whole more attractive. Not only are rates going up, but also the future is less uncertain and periodic payments – which are horrible for carriers – just got a lot less attractive to claimants.
What does all this mean for brokers? Well rates will have to go up – the impact might take some time to work its way around the whole market but all providers will be affected in the end. In terms of financial stability a strong balance sheet and well diversified portfolio are the best indicators for which carriers will see Ogden as a blip rather than a catastrophe. But most importantly customers are going to see rate increases to pay for the sort of terrible incidents that fortunately the vast majority will never be exposed to. They are going to need the support of their brokers more than ever.
Tim Holliday is the former MD for UKGI personal lines at Zurich a position he took on in 2014 having been on the UK executive team as chief underwriting officer since 2006. Prior to this he worked in insurance analytical roles. He remains involved with the industry with several NED roles.
Tim Holliday has provided a fascinating insight into the current and future impact of the Ogden rate changes as well as interesting context through a historical comparison with 2001. Some brokers may feel that the discount rate topic is just for insurers and not for them. But the issues he raises are undoubtedly ones that all should take on board. Leave a comment below or join the debate at www.twitter.com/#insagedebates
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