Ogden rate change costs insurance industry £3.5bn

The overall cost to insurers and reinsurers of the UK’s change in the personal injury Ogden discount rate is estimated at £3.5 billion across all lines of business, according to advisory firm EY.

In February, the Lord Chancellor decided to change the Ogden discount rate to -0.75 percent from 2.5 percent.

The so-called Ogden tables detail figures to be used to multiply the annual cost of a damage to be awarded in serious personal injuries cases.

The motor insurance market has reported significant underwriting losses in 2016, according to EY’s annual UK motor insurance results seminar. Following a 100.5 percent net combined ratio (NCR) in 2015, there was a sharp deterioration to 109.0 percent NCR in 2016 following the review of the Ogden discount rate for personal injury claims.

Although the change to the discount rate was announced in February this year most insurers reflected the impact on outstanding claims in their 2016 figures. Without the Ogden rate change, NCR in 2016 would have been 8.8 points lower at 100.2 percent.

The ongoing costs from the new Ogden rate, and the need for insurers to rebuild reserve margins released to offset it, will lead to further pressure on the NCR in 2017 and EY expects it to deteriorate 3.1 percent compared to the 2016 performance (excluding the Ogden impact).

Motor premium rates were already at record highs in Q1 2017 (£462) according to the Association of British Insurers premium rate tracker. However, rising reinsurance and claims costs due to the new Ogden rate, high repair cost inflation and the rise in insurance premium tax to 12% could cause consumer rates to increase by a further 9.0 percent in 2017 to £503, EY predicts.

“The impact of the Ogden rate change, together with the increasing cost of repairing ever more complex cars, will inevitably filter through to premium rates,” said Tony Sault, UK general insurance market lead at EY.

“For Ogden alone, the higher compensation now due for serious injuries means insurers will have to pay out around 9% more in future claims. This will translate into a £28 increase to the average cost of a comprehensive policy.

“Further effects will be felt next year when annual reinsurance cover for large claims come up for renewal. Young drivers will undoubtedly have to bear the brunt of the increase due to the disproportionate number of larger claims they cause. A fundamental review of Ogden and the Government’s proposed whiplash reforms are increasingly urgent for consumers and must not be abandoned in the aftermath of the general election.”

The UK’s Chancellor Philip Hammond has agreed to a consultation on the framework for setting future personal injury (Ogden) rates.

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