Ogden decision could undermine periodic payments and boost demand for lump sum payouts, warns Unipol’s Sordoni

The decision to set the Ogden discount rate at minus 0.25 percent is likely to push people being awarded large insurance payouts to demand lump sum payments, rather than periodic payment orders (PPO).

That is the warning from Marco Sordoni, CEO at UnipolRe. And, he said, this could be storing up problems for society in the long run.

The Ogden discount rate was changed from minus 0.75 percent to minus 0.25 percent in July, which caused widespread dismay across the UK re/insurance industry. The rate is used in the UK to calculate how much insurers should pay in compensation to people who have suffered life-changing injuries, and re/insurers had been hoping the rate would be set at a higher rate.

“There is a bit of a paradox in that the UK government was originally trying to make something similar to what is available in France, which is the PPO,” said Sordoni. But this decision makes PPOs less attractive, he said.

PPOs ensure those with injuries have predictable payments coming in that can cover expenses that can potentially last for many years, or even a lifetime. The alternative a lump sum payment might in some cases be spent quickly, leaving people without the means to pay for ongoing expenses years down the line.

The fear is, the decision to pay the PPO with a negative rate provides the wrong kind of incentive. “If there is a court settlement, who that has been injured, or is in a position of being reimbursed, is going to choose a PPO with a negative rate? It is going to push people towards choosing a lump sum payment,” said Sordoni.

There has been concern that some re/insurers might reduce their exposure to the UK market, or even pull out altogether, in response to the Ogden decision, but UnipolRe is considering no such thing, said Sordoni. UnipolRe remains committed to the UK market, he insisted.

Sordoni said: “We are not one of those reinsurers that is going to step out of the boat because it is shaking a little bit. The UK is a strategic market for us and we will continue to do business there.”

He noted that the Ogden development had similar precedents with legal changes in France and Belgium, and predicted the market will adapt.

“There are many possible solutions, the re/insurance market will just have to change the structure,” said Sordoni. “If the market behaves in a reasonable way it will be absorbed within the reinsurance conditions.”

More broadly, UnipolRe remains entirely focused on the European market. While it does not rule out one day expanding to do business in the US and Asia, it has no plans to think about that for the foreseeable future.

“We want to put one step forward at a time, we do not want to try and run before walking,” said Sordoni.

Unipol has invested €300 million into the business in the last three years, on top of the €195 million it launched the reinsurer with a €0.5 billion investment in all.

Sordoni is happy with how the business is growing. It has a positive outlook rating from AM Best, reaffirmed recently, which it has built up from a standing start, despite its rating effectively being capped by the Italian sovereign rating due to its ownership.

“We are a young company but we have strong compliance, efficient governance, and strict disciplined underwriting,” he said.

“We refuse business, not because it is bad business, but because we are not able to assess it. We want to focus on the sweet spot where we are comfortable, and we want to build relationships with our clients.”

UnipolRe is determined that it does not get into a situation where it agrees to do business in one year but then pulls back, causing clients to question its commitment.

“We prefer to be cautious, which is also reliable,” he said.

This attitude is reflected in Sordoni’s attitude to the potential disruption of insurtech, and the challenge of coming to terms with sweeping changes to the structure of the global economy, exemplified by the growth of companies such as Airbnb and Uber.

Sordoni believes the re/insurance industry is responding in a steady, measured way, and will continue to do so.

“People say it is a revolution, it is full disruption. People say nobody is going to buy insurance from an agent again,” he said.

“But the disruption is going to be slower than people think. Insurance is a complicated product, and understanding the client is essential.”

He does not believe reinsurance faces an existential threat from insurtech. “It is great to have a nice app but that doesn’t solve everything,” said Sordoni.
“We reach 4.2 million cars but that took a lot of work, it took advertising, it took discussions with clients, offering a range of services.

“I believe in technology as a way of better serving the needs of our clients, but you cannot reduce the insurance business to the simple push of a button,” he concluded.