Mohammad Khan, UK general insurance leader at PwC, comments on the Lord Chancellor's announcement this morning to change the Ogden discount rate to -0.75%
"The Lord Chancellor's announcement on the Ogden rate change to -0.75% was not anticipated by the insurance industry and is more than they were expecting. Unfortunately, this announcement will have a significant adverse impact on motor insurance prices that drivers pay and also commercial insurance rates paid by small businesses.
"As a direct result of this change, we anticipate an increase of £50-£75 on an average comprehensive motor insurance policy, with higher increases for younger and older drivers – potentially up to £1,000 for younger drivers (18-22 year olds) and a rise of up to £300 for older drivers (over 65 years old).
"This announcement, on top of the recent increases in insurance premium tax, will make redundant any savings to premiums as a result of the government’s personal injury legal reforms which were anticipated to generate approximately £40 saving per motor insurance policy.
"There will be a dislocation in the pricing due to the fact that different insurance companies have different reinsurance programs – insurers with lower levels of reinsurance may not need to increase their pricing immediately, creating pricing opportunities within the market. In any case, due to the competitive nature of the insurance industry, policyholders should be able to reduce any impact by shopping around but younger and older drivers will see significant price increases regardless.
"As has already been announced by a few companies, some insurers had provided for a discount rate move to 1.5% or 1%. The announcement of a move to -0.75% means many insurers will need to further increase their reserves, potentially impacting expected results for year-end 2017 for those who have already announced their results and year-end 2016 for those that have still to report.
"The announcement will also impact reinsurance pricing by pushing prices up for motor and liability reinsurance cover. This may impact the business models of companies that rely on low layers of reinsurance who will be faced with much higher costs of doing business after they renew their reinsurance.
Commenting, Stuart Crisp, Insurance Partner, KPMG UK says: "Making sure people are adequately compensated when the unexpected happens is the reason insurers exist, so it's important that the Ogden rate should reflect appropriate returns and it's not clear that today's announcement does that. For insurers this will be a very significant hit to profits when compliance and tech are already causing serious cost pressures. The rate hasn't changed in well over a decade and we're now at a time of considerable market uncertainty as the geopolitical environment remains turbulent. Many may be asking, why now?"
James Rakow, insurance partner at Deloitte, commented: “In light of current low levels of investment return, the rate cut should not have come as a surprise. Insurers have shock absorbers in place, such as reinsurance protections and capital resources, to help them weather the financial effects of today’s announcement. Consumers should expect to see increases in their motor insurance premiums as a result of today’s announcement. Just how much will depend on the extent insurers choose to pass on higher claims costs.”
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