AM Best warns on impact of UK personal injury rate change on re/insurers

The shift in the personal injury rate is a clear negative for the short-term earnings and capitalisation of UK insurers, particularly those with large motor portfolios, AM Best said in a statement.

Companies are expected to strengthen reserves for bodily injury claims and adapt their pricing strategies in an attempt to offset deterioration in loss experience, according to a briefing titled 'Reserve Strengthening to Follow UK Personal Injury Discount Rate Change'.

The UK’s Lord Chancellor and Justice Secretary Elizabeth Truss has decided on February 27 to change 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. The change exceeded the level expected by the industry.

Motor insurers and reinsurers will bear the brunt of the impact, but writers of other liability lines will also be affected, AM Best noted. The change is likely to offset the positive effect on claims costs of recent whiplash reforms and result in material rate increases in the motor sector.

Due to the decision of the Lord Chancellor to cut the personal injury discount rate, Aviva expects to take a charge to its 2016 IFRS profit after tax of approximately £385 million.

Catherine Thomas, senior director of analytics at AM Best, said: “Earnings for U.K. motor insurers for the first quarter of 2017 are expected to form a pretty bleak picture, with reserve strengthening for most insurers likely to hit this financial period. Higher losses will put further pressure on the motor segment, which already has a track record of weak performance due to inadequate pricing and poor claims experience.”

The briefing says other liability classes in the United Kingdom where bodily injury liability arises will also be affected. AM Best expects exposed companies to make a one-off reserve charge for claims relating to business already underwritten and to assume higher claims costs when reserving for future business.

Myles Gould, senior financial analyst, said: “AM Best expects the market to impose premium rate hikes and higher deductibles across the segment with immediate effect, affecting personal and commercial policies regardless of whether the level of coverage is comprehensive or third-party only. In addition, it is likely that higher risk customer segments, such as the under 25s and over 75s, will experience even greater premium hikes at renewal. Double-digit percentage increases in renewal premiums for many could result as insurers seek to pass on to consumers the impact of higher claims costs and rises in insurance premium tax.”

For companies with portfolios focussed on UK motor business, the Ogden rate cut is likely to have earnings and capital implications. However, AM Best does not expect to take any rating actions as a direct consequence of the change, as rated insurers exposed to UK motor claims tend to be well diversified by geography and business line.

Meanwhile, the British Insurance Brokers' Association (BIBA) urged the government to freeze insurance premium tax following the discount rate change.

Insurance premium tax has been collected on insurance policies sold in the UK since 1994 when the rate was 2.5 percent. This was raised gradually to a previous high of 6 percent in 2010. In 2015 the Chancellor revisited insurance premium tax and, between then and now, the amount payable to Government coffers has doubled to a rate of 12 percent on most types of insurance from June 2017.

In the last Autumn Statement, the Chancellor hinted that the tax paid on insurance could increase, almost doubling again.

Steve White, BIBA chief executive said: “Insurance Premium Tax is regressive and penalises those who pay more for their insurance. This includes groups such as young drivers and communities in flood risk areas. For example, the tax contribution for a £1,500 young driver’s policy has increased from £90 to £180 in the last 18 months alone. With young drivers more likely to drive without insurance, any further increases are likely to have an impact on the number of uninsured drivers on the UK’s roads.

"This is simply not acceptable which is why in collaboration with our members, insurers and other bodies we are making clear to Government our concerns. It is our members’ view that current policy on Insurance Premium Tax is detrimental to the take up of insurance and the more people and businesses that remind Government of this, the more difficult it will be for them to push through further increases."

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