Fitch Ratings analysts believe that U.S. and Bermuda re / insurers that cover personal injury in the UK will quickly adjust to higher costs resulting from a change in the billing calculation, with their profits only deteriorating for a short period of time.
However, the need to set aside additional reserves for UK risk adds to the pressures they face from falling reserve margins, low investment returns and competitive prices, Fitch added.
The rating agency notes that companies that write or reinsure the UK liability business will face greater claims after a decrease in the Ogden discount rate, which is used to calculate flat-rate payments for personal injury claims to cover nursing costs or loss of earnings.
However, it is expected that they should be able to pass the higher cost of new contracts on to their customers by increasing the premium rates and that the credit profile does not deteriorate significantly in the long run.
“Insurers and reinsurers will suffer a one-off profit shock if they postpone the additional reserves for contracts that were in effect before the change was announced, in anticipation of higher payments for claims that have not yet been received, reported or settled.” Fitch noticed.
“Most of the additional claims costs and associated premium increases caused by the lowering of the Ogden discount rate will flow to the reinsurance market as insurers make extensive use of deductible and low-limit reinsurance to reduce their risk of personal injury in the UK. “
The Ogden rate was cut from 2.5% to -0.75% as of March 20, 2017 to reflect lower risk-free returns in the UK economy over the past few years.
Some firms had already set aside reserves to offset an interest rate below 2.5%, but Fitch doesn’t think anyone expected such an extreme rate cut.
The rate cut is having a significant impact on UK car insurers, with personal injury accounting for around half of the total cost of car insurance claims.
Comments are closed.