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IUA and BIBA set out Ogden reform plans

May 16, 2017

The British Insurance Brokers' Association (BIBA) and the International Underwriting Association of London (IUA) have become the latest organisations to submit their responses to a government consultation on the Ogden discount rate, following calls for reform from the Lloyd's Market Association (LMA) and the Association of British Insurers (ABI) last week.

In February, the Lord Chancellor decided to change the Ogden discount rate by 3.25 points from 2.5 percent to -0.75 percent, forcing carriers to bolster reserves and consequently impacting their profitability.

Since then, Chancellor Philip Hammond has agreed to a consultation on the framework for setting future personal injury rates.

In its response, the IUA said that the UK discount rate “must better reflect investment strategies, be subject to regular review and set by a politically accountable minister”.

The trade body said that the rate should be reviewed either annually or every three years, adding that maintaining a single discount rate would be “a simple and straightforward solution” although noting that the “benefits of a dual rate model could be explored through further consultation”.

“It is clear that the methodology used and assumptions made to set the discount rate are flawed,” remarked IUA chief executive Dave Matcham.

“The current rate of minus 0.75 percent will inevitably lead to overcompensation, which is compounded by the long-term nature of many settlements. A negative real return is assumed not just for year one, but for every year for decades to come,” he continued.

The IUA also called for the discount rate to be linked to the yield on a balanced portfolio of low-risk investments, resonating feedback from the LMA, ABI and BIBA.

Currently, the Ogden rate is based on index-linked government bond rates.

The IUA that the rate should continue to be set by the Lord Chancellor, in contrast to the LMA which called for this to be done by an independent panel.

Meanwhile, BIBA executive director Graeme Trudgill said that it may be better to review the rate when there was deviation against a pre-agreed norm of a basket of low-risk mixed portfolio investments.

Like the ABI, BIBA also called for the government to seek the advice of experts and consult with representatives of claimants and defendants groups when setting the rate.