Ogden discount rate revision may impact reserves: AM Best

The revision of the Ogden Discount Rate will lead to reserve strengthening for companies that had booked motor and liability reserves in the zero to one percent range, according to a new commentary by AM Best, although the impact on capital of UK insurers is not expected to be significant. Some insurers will experience a one-off hit to earnings as prior-year reserves are strengthened; however, they should be able to price the change into new business.

A report by the rating agency examines the impact of the UK government’s first review of the Discount Rate under the Civil Liability Act (passed 20 December 2018), which was announced on 15 July 2019, with the rate being revised from – 0.75 percent to – 0.25 percent. The Discount Rate is used to calculate the value of the lump sum awarded to a personal injury claimant in order for it to be equivalent to a fixed annual income over a set period.

Will Keen-Tomlinson, financial analyst, said: “Reserving practices vary across the industry. AM Best understands that while some companies are currently reserved conservatively, based on a Discount Rate of negative 0.75 percent, others have been taking a more speculative approach and have been reserving assuming a rate of zero to one percent. Consequently, the announcement may lead to reserve releases or reserve strengthening depending on each individual company’s current assumptions.”

Timothy Prince, director, analytics, added: “Overall, insurers will be disappointed that the change did not meet industry expectations and policyholders are unlikely to see meaningful motor or liability premium reductions in the near future. The alteration is likely to have a minor one-off earnings impact on some companies through strengthening or release of reserves. However, AM Best does not expect it to have a material impact on the capitalisation or credit ratings of UK insurers.