UK government on collision course with re/insurance industry

The UK’s Lord Chancellor and Justice Secretary Elizabeth Truss surprised markets on February 27 by reducing the Ogden discount rate to -0.75 percent from 2.5 percent.The so-called Ogden tables are used to calculate compensation awards for serious personal injuries.

Motor insurers and reinsurers will bear the brunt of the impact, but writers of other liability lines will also be affected, AM Best explained in a statement.

According to analysis by broker Willis Towers Watson the Ogden rate change will cost the insurance industry, in particular reinsurers, a material one-off reserve charge of approximately £5.8 billion. In addition, there would be a roughly £850 million per annum increase in the cost of providing motor insurance in the future.

The sudden decision by the government forced Aviva to issue a profit warning just before publishing its 2016 results. The company said that it expects to take a charge to its 2016 IFRS profit after tax of approximately £385 million because of the Ogden rate change.

Direct Line Insurance Group said it expects profit before tax to fall by between £215 million and £230 million after reinsurance recoveries, and many others are following with similar corrections to their results.

“This has been incredibly badly handled,” says Richard Pryce, CEO of QBE Europe at a 27 Feb. press briefing in London.

“To have something major as this going on at results time makes it almost untenable for some companies. You’ve seen people delaying results. […] It was almost thrown at us in the last minute,” Pryce says. “It just doesn’t give a good look to the UK economy from outside,” he notes.

The Association of British Insurers reacted with unusually sharp criticism, calling the rate cut “crazy.”

Claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK, director general of the Association of British Insurers (ABI), Huw Evans explains in a statement.

The ABI estimates that up to 36 million individual and business motor insurance policies could be affected in order to “over-compensate” a few thousand claimants a year.

“To make such a significant change to the rate using a broken formula is reckless in the extreme, and shows an utter disregard for the impact this will have on consumers, businesses and the wider operation of the insurance market,” Evans notes.

In December 2016 the ABI has launched a legal challenge to Lord Chancellor’s decision to review discount rate for personal injury damages.

The discount rate is a tool designed to ensure claimants are not under or over-compensated. It adjusts personal injury damages awards to take into account the return expected when a compensation lump sum is invested.

But the UK is an outlier internationally in its reliance on a single measure when determining the discount rate (gross redemption yields of Index-Linked Government Gilts) rather than a formula similar to one used by a real life investor, according to the ABI.

No one else in Europe follows this “flawed methodology” and the ABI says it is critical the Lord Chancellor update it.

The industry appears to have found someone with some sympathy for its concerns in the person of the Chancellor of the Exchequer, Philip Hammond.

After a meeting with several industry leaders a day after the Ogden rate change decision, Hammond announces a consultation on the framework for setting future personal injury (Ogden) rates.

“The government will progress urgently with a consultation on the framework for setting future rates, and bring forward any necessary legislation at an early stage,” Hammond says in a joint statement with Evans.

Willis Towers Watsons has recommended that the Ogden rate, which until now had been left unchanged for 16 years, should be either regularly reviewed and revised or pegged to an independent economic indicator.

Be that as it may, the UK government might soon face an additional conflict with the re/insurance industry over further increases in the insurance premium tax (IPT).

The standard rate of IPT will increase from 10 percent to 12 percent from June 2017. This increase will mean the rate will have doubled from 6 percent to 12 percent in under two years.
It is estimated that the latest increase will raise an additional £680 million in 2017/18, rising to £840 million the year after, according to KPMG.

When announcing the extra 2 percent increase in the last Autumn statement, the chancellor, Philip Hammond, said IPT rates in the UK remained some of the lowest in Europe and that money was needed to pay for the government’s infrastructure plans. Overall, the IPT is set to contribute £7 billion to Government coffers, but it wants more, according to British Insurance Brokers' Association (BIBA).

Already at that time the ABI described the increase as a “hammer blow for the hard-pressed”.
But the row may escalate further. In the Autumn Statement, the Chancellor hinted that the tax paid on insurance could increase, almost doubling again, BIBA said in a Feb. 28 statement.

A survey of insurance brokers conducted by BIBA reveals a concern that many individuals, households and businesses are likely to dramatically scale back their insurance protection if the tax on insurance increases in the forthcoming Budget 2017. This would come on top of the potential impact of the Ogden rate change, which could increase some premiums by £1,000 and an average comprehensive motor policies even rising by up to £75, according to BIBA.

The lobby group has therefore urged the government to freeze insurance premium tax following the discount rate change in a Feb. 28 statement.

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