Remember when UK insurers’ earnings were hit following the Ogden rate cut last February? Well, now firms can breathe a sigh of relief – albeit a small one – as Fitch Ratings says the proposed rate announced last week will partly undo the harm.
According to the credit rating agency, one-off reserve releases will boost insurers’ earnings. “However, the change could also increase insurers’ exposure to longevity risk as a result of greater propensity for claimants to take the periodic payment orders (PPOs) alternative,” it added.
The cut from 2.5% to -0.75% earlier this year pushed insurers to set aside reserves in order to cover increased claims costs – impacting earnings and causing premiums to rise. Fitch noted that
Aviva reported a £475 million reduction in its 2016 pre-tax operating profit due to the previous adjustment; with £100 million for
Admiral’s pre-tax profit.
“The proposed new methodology for setting the rate will allow insurers to release some of these reserves, as outstanding claims may be settled under the new regime,” said Fitch. As for the effect on motor insurance premiums – which rose 11.5% year-on-year at the end of June – it looks like the damage has been done.
Fitch explained: “We believe the now proposed change in the Ogden rate could leave premiums broadly flat for the rest of the year, but is unlikely to materially reverse the recent increases. This is because other major elements of claims costs are rising strongly, driven in part by the increasing complexity and cost of replacement vehicle parts.”
In terms of reinsurance, the credit rating agency expects pricing to increase “only modestly” in the renewal period next January – regardless of when the new rate is implemented. Fitch said this will benefit both insurers and the policyholders.
The Ministry of Justice announced the proposed rate of 0% to 1% last Thursday, much to the delight of the insurance industry. The Association of British Insurers
described the new personal injury discount rate – which will require parliament approval – as fairer for claimants, customers, and taxpayers.
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