Impact of the Ogden Rate change on the UK Reinsurance Industry

 

The reinsurance industry was left reeling 12 months ago when the government announced a cut in the Ogden rate from 2.5% to -0.75%.

Almost immediately, insurance providers issued profit warnings and made provision for predicted losses by increasing premium charges, and reinsurance providers were also alarmed.

The immediate consequences included increased costs of hundreds of millions for insurers and an increased indemnity spend. Some reinsurers were hit by a one-off charge in the first six months of 2017. Primary motor insurers were hardest hit, with most of the losses being directly transferred to the reinsurance sector.

In the wake of serious lobbying from the industry, the government looks set to reconsider the move, as the original swathing cut in the Ogden rate may have been too heavy handed.

The government’s decision in February 2017 to tackle the discount rate head on came as a surprise, as preceding governments have been reluctant to interfere, considering it a political hot potato. However, Liz Truss, then Lord Chancellor, took a different approach in the wake of Wells vs. Wells.

The cutting of the rate was seen as over-generous to claimants and to underestimate what they could expect to earn in interest on their pay out over the long term, representing a windfall for this group.

Approaches to the government by the industry had an almost immediate effect when the Ministry of Justice (MOJ) announced a consultation at the end of March 2017 and published draft legislation in July last year. This proposed legislation indicated that the rate would be returned to a level of between 0% and 1%.

However, it soon became clear that the government, with a slim majority after the general election, would be cautious about bringing the legislation forward. Indeed, the Judicial Select Committee heard evidence from the industry in November, but the committee has stated that more research is needed before any change can be implemented. This, combined with a change of Lord Chancellor, has dismayed the reinsurance industry, and decreased hopes of a revision in the rate by mid-2018, which would have appeased most CEOs. In addition, an expert panel still needs to be appointed to advise the Lord Chancellor on a first review of the evidence, which will slow any potential changes to legislation even further.

The major concern in the sector is now that there will be no change in the rate until 2019, and that the government will seek to bury the issue. One glimmer of hope came from a junior justice minister who stated in Parliament in November that the MOJ would respond to the report within two months of publication. This would mean that the new Lord Chancellor will need to comment by the beginning of February.

The longer the wait, the less reliance can be placed on the 0% to 1% figure, as the MOJ has also indicated that this figure was only intended to be illustrative.

 

This article was written by Nick Hoadley, Managing Director, Insurance Search.

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