Reinsurers stick to UK motor business despite Ogden jitter

But the motor reinsurance market is likely to recover quickly, helped by price increases in the primary insurance segment but also on the reinsurance part of the business, suggests Grange Turner, director at broker Willis Re.

In February, the UK government shocked markets by cutting 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 discount rate has been unchanged since 2001.

According to analysis by Willis Towers Watson, the Ogden rate change will cost the insurance industry a material one-off reserve charge of approximately £5.8 billion. In addition, there would be a roughly £850 million per annum increase in the cost of providing motor insurance in the future. Between 70 percent and 80 percent of the expected reserve increases may be borne by reinsurance, according to market estimates.

“Excess of loss reinsurers are particularly affected by the Ogden rate change because the impact is going to be felt most dramatically on large claims,” Turner says.

“The very largest claims will generally see the biggest proportionate increases in claims costs because they are the ones which have the largest components of future care, which is what the Ogden is designed to calculate,” he explains.

Primary insurers have been quick to calculate and report the impact of the Ogden rate change on their balance sheets. Among the hardest hit was UK insurer Aviva, where profits were hit by a £380 million after-tax charge due to the reduction in the Ogden discount rate.

For reinsurers the calculations of the consequences take longer not least because the companies lack the necessary details.

“The impact on reinsurers’ reserves depends on each individual claim, which has many individual components, some of which will be impacted by the Ogden rate change and some of which won’t,” Turner says. “At the reinsurance level, in many cases you probably don’t know enough detail of the claims to revalue them yourself. Reinsurers need to wait for their original clients to revalue their claims to get a true picture of the impact of the rate change,” he explains.

No market share data is publicly available for the UK motor reinsurance market. But R+V, a German cooperative insurer and reinsurer, and Hannover Re are said to be relatively strong in this segment.

“We write about £50 million UK motor excess of loss business, we write very little proportional motor business in the UK,” Hannover Re CEO Ulrich Wallin told analysts when presenting full-year 2016 results. “We believe we are very conservatively reserved there and would believe that it is sufficient to deal with the new Ogden tables”.

R+V noted that the Ogden change rate will affect 1 percent of the total group’s revenues of around €15 billion. “The effect on reserving is currently being analysed. Based on past conservative reserving practices for similar situations there is currently no immediate negative impact foreseeable on the company’s financial performance,” the company said in a statement received by Intelligent Insurer.

Munich Re and Swiss Re are described as proportionately less affected than others in the market. Overall, the impact will not least depend on the companies’ reserving practices.

Munich Re responded to an Intelligent Insurer request for comment by saying: “As a change in the Ogden discount rate has always been a possibility, we have considered such a scenario as one of the reserve risks for many years already. We reserve for bodily injury exposure (lump sum payments and periodic payment orders) in the UK in line with Munich Re’s cautious reserving practice. However, we will only be able to fully assess any impact over time. From today’s point of view, we do not expect a material adverse effect on our reserve position.”

Swiss Re told Intelligent Insurer that “the estimated net impact of the Ogden rate change is well within the group reserve margins and Swiss Re continues to be adequately reserved.”

As the magnitude of the Ogden discount rate change has surprised the markets, reserve increases can generally be expected in the reinsurance sector. And higher reserves are set to impact reinsurers’ results, in line with the primary insurance market. However, the motor re/insurance market is likely to adapt fairly quickly to the new operating environment.

“It’s likely that the pricing of motor insurance for the consumer will go up in direct response to the Ogden change,” Turner says. “This will boost the amount of original premium coming into excess of loss contracts, mitigating the need for reinsurers to put up their own pricing as much as they otherwise might have,” he says.

But reinsurers are likely increase rates, nevertheless. Hannover Re’s Wallin said that “there will be significant rate increases on UK motor. However, at this point of time, we are analysing the numbers really in order to come up with pricing.”

Swiss Re noted that "given the significance of the change, reinsurance rates will be adjusted to reflect the impact of the new discount rate on lump sum settlements."

Price increases may be restrained by the fact that PPOs become less attractive after the Ogden discount rate cut. The rise of PPOs has created complications for the reinsurance market as it introduced elements of longevity and investment risk to the segment. But the Ogden rate decision might now alleviate the issue.

“We expect fewer claims settled as PPOs,” Turner says. “As a result there will be less need for reinsurers to be loading the price of the excess of loss products to cater for the volatility associated with PPOs,” he explains.

Swiss Re said that it expects that the negative impact from the expected increase in the lump sum payments due to the Ogden change will be partially offset by the expected positive impact on US GAAP from a lower PPO propensity.

Another factor which is likely to restrain reinsurance rate increases is higher competition. The Ogden rate decision as such has been expected for some time, creating significant uncertainty which kept some players out of the market.

“We may see an increase in appetite from some reinsurers that have avoided motor excess of loss in recent years in the UK because of uncertainty around the Ogden rate change,” Turner says. “We’ve already seen a number of reinsurers expressing interest in growing their books in the UK motor business.”

But demand for reinsurance may also rise on the back of the Ogden rate change. Since Solvency II rules were introduced at the beginning of 2016, some insurers are confronted with tight solvency margins. As a result, Solvency II-driven reinsurance solutions have been a growth driver for the industry.

“The Ogden rate change will exacerbate solvency issues at some primary insurers, further boosting demand for Solvency II solutions from the reinsurance market,” Turner says.

The re/insurance industry might also face some relief from a consultation on the Ogden rate setting process announced by the government.

Options for reform to be considered include whether the rate should in future be set by an independent body; whether more frequent reviews would improve predictability and certainty for all parties; and whether the methodology is appropriate for the future, according to the Ministry of Justice.

“The general consensus in the market is that as a result of the consultation, change is likely and when the change comes it will be an increase rather than a further reduction [of the Ogden rate]. This might well involve a change in the way the Ogden rate is being calculated,” Turner notes.