13 February 2017Insurance

Higher claims cost settlements likely due to UK Ogden discount rate change

A likely reduction in the UK's Ogden discount rate in February 2017 would result in higher costs for claims settled as a lump sum, Fitch Ratings said.

This could be significant as many payouts are intended to cover decades of costs, so small changes in the discount rate can add up to a large effect on lump-sum payments, according to the agency.

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

The poor profitability of the UK personal motor market means the sector is unlikely to be able to simply absorb increased claims costs. Insurers are therefore likely to pass on increases in claims costs and reserving adjustments to consumers in the form of higher premiums. The reduction in the Ogden rate could more than offset the savings expected from the government's whiplash reforms announced in 2016. Motor premiums were at their highest for five years in the fourth quarter of 2016. We believe premiums will continue to rise further if the Ogden rate is lowered.

Fitch also believes that a decrease in the Ogden rate could result in a lower number of large bodily injury (BI) claims being settled as periodic payment orders (PPO), as a lower rate would increase the value of lump sum settlements and potentially make them more attractive to claimants. This is positive for insurers in one way at least, as administering PPOs presents significant challenges for non-life insurers in managing longevity, inflation and long-term investment risks.

In large BI claims, claimants can opt to receive their payment, to cover loss of earnings and future costs of care, as a one-off lump sum or as a stream of payments over the course of their life, a PPO. The lump sum payments in large personal injury and fatal accident cases are calculated using the Ogden tables, a set of actuarial tables that contain discount rate assumptions and corresponding multipliers which depend on the claimant's age, gender and life expectancy. The current Ogden rate was set by the Lord Chancellor in 2001 at 2.5 percent.

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