September 07, 2017
The UK government’s proposed legislation to change the way the Ogden discount rate is calculated could save (re)insurers up to £2.5bn, Ernst & Young (EY) has estimated.
On 7 September, the Ministry of Justice (MoJ) announced that the draft reforms would result in a rate of between 0 percent and 1 percent. This compares to the initial reduction in the Ogden discount rate from 2.5 percent to -0.75 percent in February.
The proposals come after months of lobbying from the (re)insurance industry, with the government launching a consultation in March.
Under the bill, which has yet to be approved by parliament and are unlikely to take effect for several months, the Ogden rate will be set using what the government calls “low risk” investments, rather than “very low risk” investments.
Furthermore, the rate would be reviewed every three years by the government actuary and an independent panel of experts.
“We think that motor and liability insurers will welcome the revised proposals – not only because of the cost impact, but also because of the promise to build in a three-year review process which will hopefully avoid the impact of large rises going forward,” remarked EY partner Tony Sault.
Earlier this year, EY has calculated that a -0.75 percent Ogden rate, which has been in force since 20 March, would cost the industry an additional £3.5bn and add 6.5 percent to customer premiums.
Sault continued: “We believe the new proposals, which the Government expects to imply a real rate of 0 percent to 1 percent, will have a significant impact on these costs. A revision to 0 percent could reduce these costs by one-third meaning reserve releases of £1.2bn, while a change to 1 percent could reduce this by two thirds, meaning up to £2.5bn could be saved by insurers and reinsurers compared to their current booked position.”
“We would also expect the recent rise in premiums to level off in anticipation of the new legislation, and ultimately premiums could fall between 2 percent and 4 percent, saving up to £21 on the average premium to the consumer,” he concluded.