(Re)insurers are expected to absorb an overall £3.5bn hit from the recent Ogden rate change, according to estimates from EY.

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.

The professional services firm said that around £2.4bn of losses have already been publicly disclosed by insurers and reinsurers since the decision was made, which it used along with its own calculations to produce the higher £3.5bn loss estimate.

According to EY analysis, the Ogden rate cut caused an 8.8 percentage point deterioration in the 2016 net underwriting performance for the UK motor insurance market, with the sector reporting a net combined ratio (NCR) of 109.0 percent.

Excluding the Ogden impact, the firm highlighted that the 2016 NCR have been 100.2 percent, roughly in line with the 100.5 percent result recorded in 2015.                               

EY predicted a further 3.1 point rise in the market NCR in 2017 to 103.3 percent (excluding the Ogden impact) versus 2016, as UK motor insurers are pressured by reserve strengthening and ongoing Ogden costs.

However, the firm expects the sector’s NCR to revert back to 100.2 percent in 2018 if the promised whiplash reforms and a review of Ogden methodology materialise.

“The impact of the Ogden rate change to the motor insurance industry has been considerable at around £3.5bn. While a reduction was certainly on the cards, virtually no-one anticipated the extent of the drop,” commented Tony Sault, UK general insurance market lead at EY.

“The general election result last week may have created additional uncertainty and insurers will be hoping that the Ogden consultation and reform of whiplash claims will remain priorities for the new Lord Chancellor and the Government,” he added.

Sault said that both consumers and insurers are being impacted by the effects of the Ogden rate change.

Combined with high repair cost inflation and the rise in insurance premium tax to 12 percent, EY predicted that average motor premiums could see a further 9 percent rise in 2017 to £503 from the already record highs of £462 recorded at the end of Q1 2017.

“For Ogden alone, the higher compensation now due for serious injuries means insurers will have to pay out around 9% more in future claims. This will translate into a £28 increase to the average cost of a comprehensive policy,” explained Sault.

“Further effects will be felt next year when annual reinsurance cover for large claims come up for renewal,” he added.