Analysis: The challenges motor (re)insurers face amid Ogden reform

Insurers and reinsurers still face uncertainty and challenges in the UK motor market despite some recent stability that the government’s ruling on the all-important personal injury discount rate has given, experts say.

The Ogden discount rate is set at a certain level to which UK insurers calculate compensation pay outs for injuries, and changes to the rate lead to billions of pounds more or less in what is finally paid to claimants.

In July, the then Lord Chancellor David Gauke set the rate to -0.25%, a more favourable level to the last rate change of -0.75% in 2017.

However, many UK insurers and reinsurers had been expecting the rate to be set at an even more favourable level of between 0% and +1%, leading to UK insurers having to pump hundreds of millions into their reserves.

QBE had been reserving at +0.25%, leading to a hit of $62m, pushing the group into a half-year underwriting loss of $24m.

Reinsurance pricing change

Deloitte insurance partner James Rakow says: “So much of the uncertainty has disappeared but I wouldn’t say the Ogden debate has fully resolved itself, but it does give the insurers and reinsurers something quite concrete to work with.”

Rakow says the up and coming reinsurance renewal season will be ‘interesting’ because there will be ‘a new pricing equilibrium’ based on the discount rate change.

Grange Turner, executive director at reinsurance broker Willis Re, said in an interview that the Ogden rate change is likely to have an impact, but only a small one.

He said most reinsurers were setting U.K. motor excess-of-loss prices assuming a change to 0%.

Willis analysis indicated little pricing impact when shifting to a negative 0.25% rate from 0%.

However, he believed the Ogden rate change may well spark a renewed appetite to write business in certain sectors of the reinsurance market.

Both new entrants and those who had taken a defensive position until the situation had stabilised may be more willing to write motor excess-of-loss reinsurance.

Andrew Hibbert, partner and head of the catastrophic injury team at BLM, is looking to the 2025 renewal season as a crunch point.

This is because reinsurers face uncertainty from the next Ogden discount rate review, which will be decided by a panel of experts within five years.

“The next big problem is a result is that we have a fixed five-year cycle for the setting of the rate.

”There is a fairly real risk that the next time this happens, and it will all straddle the 1 January 2025 renewals for the reinsurers,” Hibbert says.

“The last time they changed the rate it has not been what the market has expected. If you’ve got a price for a one, two, three or five-year reinsurance contract, if you don’t what is going to happen to the rate, it makes it very difficult.”

However, Hanover Re’s Sven Althoff, member of the executive board property and casualty, told Insurance Times at the Monte Carlo Reinsurance Rendezvous: “I don’t think anyone is interested in having a great big bang every five years with the resulting rate increases or rate reductions for the policyholder.

“Everyone has to has to buy motor policies, and of course, this always translates into happy citizens and voters. So there is a high degree of self-interest for politicians to make this more predictable.”

Cost of care rising 

Besides the changes to the Ogden discount rate, another major challenge is the cost of care.

Hibbert says: “We are seeing no slowing advancement in the cost of care.

“It costs more to care for a seriously injured person in this country than it does anywhere else in Europe.

“Going back 10 years or so, that wasn’t the case. You can only see that getting worse.

“The care industry in the UK was in part staffed by people coming here from across Europe.

“My fear is that we are going to see fewer carers available with an ageing population that needs more care in any event and so I think we will see the cost of care continuing to rise.

“Basic economics, supply and demand. That will continue and if anything, post Brexit, will accelerate.”

One benefit to come out of all these challenges for motor insurers, is that they have had to get much more sophisticated with improved data, analytics and risk selection.

Rakrow says: “One of the things that I pick up from the direct insurers is that where they believe they are doing really good things in terms of pricing and risk selection and so on, relative to others in the market, there is the expectation of recognition that they get from reinsurers around those things.”

On the other hand, Rakow believes some reinsurers have great expertise to offer primary insurers on large and complex claims.

“I think there is an opportunity for reinsurers to leverage to the market practice of what is good and works well to help put the primary insurers that they reinsure to manage their book and settle claims at the best economic value,” he says.