The 2017 Ogden rate change created chaos in the motor business

An unexpected change in the personal injury discount rate in the UK in the middle of the reporting season has required insurers delay and adjust their financial reports in 2017.

This point was noted by several executives interviewed by Intelligent Insurer for our year-end questionnaire.

“The decision by the former Lord Chancellor Liz Truss to cut the rate from 2.5 percent to minus 0.75 percent in March was as surprising as it was illogical,” said Nigel Teasdale, head of motor at law firm DWF. “The new rate seemed to have no correlation with claimant investment strategies and the returns being obtained from them.”

The Ogden rate change required motor re/insurers to make a substantial one-off increase in prior year reserves, a long-term reduction in reserve releases and a material rise in the future cost of claims.

In March, the UK’s chancellor Philip Hammond agreed to a consultation on the framework for setting future personal injury (Ogden) rates.

Later in June, the Queen's Speech 2017 announced the introduction of legislation to help reduce motor insurance premiums.

The UK government’s new proposal for the personal injury Ogden discount rate could mean reserve releases for re/insurers of up to £2.5 billion, according to consultancy firm EY.

However, the UK Justice Committee report delayed the expected Ogden rate changes. The UK's Justice Select Committee has indicated in a November report that it needs more evidence into claimant behaviour before it can approve the proposed reforms to the Ogden discount rate.

“The change to the discount rate was the most important development affecting the industry in 2017 and has inevitably led to increased levels of premiums even though insurers have been working to try to avoid passing on the full cost of the change in the hope of an early reform of the processes involved in setting the rate,” said Teasdale.

The government's proposals for reform have been welcomed by insurers including the change from very low risk to low risk investments, with a specified process for reviewing the rate every 3 years, Teasdale explained.

“However, the recent scrutiny of the proposed legislation by the House of Commons' Justice Committee has raised the suggestion of further evidence being needed which would, if accepted by government, add additional delay and in turn pressure on premiums.

“Alongside that reform, the Queen's Speech in June confirmed that despite Brexit pressures it was still the government's intention to go ahead with its reforms on whiplash and small claims generally by introducing a tariff and raising the small claims track limit. We continue to await the Civil Liability Bill to bring the tariff into operation. In the meantime, the UK Ministry of Justice (MoJ) have established working groups to take forward the process changes needed to accompany this change. I and my colleagues from FOIL are representing insurers' interests on those groups.”

This is just a snapshot of what executives told us in our Christmas questionnaire. For the full comments from all 16 executives that took part in our survey, please click here.