Ogden discount rate ‘just a bump in the road’ for motor insurers, says S&P
S&P Global Ratings said the less generous than expected minus 0.25 percent Ogden discount rate announced yesterday is ‘just a bump in the road’ for UK motor insurers.
The ratings agency said that while the change from minus 0.75 percent to minus 0.25 percent had been a ”slight surprise” for the market, which had been predicting a rate of somewhere between zero and 1 percent, it will only be “a minor earnings event for the market”.
Citing data from the Institute and Faculty of Actuaries, S&P said most insurers (77 percent) had been reserving on the basis of a discount rate somewhere in the region of zero to 0.5 percent, while the majority of the larger or listed firms that shared their reserving tactics went for zero.
Insurers will have to strengthen reserves as a result of this but the new discount rate is likely to add only a point or two to the sector's combined ratio in 2019. However, the agency added, there could be “second-order effects”.
“We believe pricing will be adjusted upward, although the competitive nature of the UK motor market will limit this effect. We may also see stiffer reinsurance pricing at the 2020 renewals for UK motor insurance providers. On the upside, the lower discount rate is likely to encourage more claimants to settle as a lump sum (the lower the discount rate the larger the lump sum settlement) rather than as a periodic payment order (PPO--where the claimant receives an annuity payment along with a lump sum)--a benefit for motor insurers looking to limit longevity risk.”
The Ogden discount rate is used to calculate the compensation due to a personal injury claimant in England and Wales, assuming the lump sum paid will be invested, the discount represents the amount that would be earned on the money in interest.
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