Best’s Briefing: Ogden Update: Proposed Legislation Positive for U.K. Insurers

LONDON--(BUSINESS WIRE)-- Proposed reforms to the law governing the way the personal injury discount rate is set in England and Wales have been broadly welcomed by the insurance industry following the announcement by the U.K. Government on 7 September 2017 of draft legislation. The reforms largely address concerns raised by insurers when the rate was cut to minus 0.75% from 2.5% in March 2017, and, if implemented, are likely to lead to a discount rate increase in 2018 and a partial reversal of recent reserve strengthening.

A new briefing from A.M. Best, “Ogden Update: Proposed Legislation Positive for UK Insurers,” notes that the fall in the discount rate into negative territory in March surprised the industry. Most companies took the associated one-off reserve hit in their 2016 results and have been assuming higher claims costs when reserving for third-party liability business written in 2017. The reduction had the greatest impact on companies writing motor insurance, but other liability classes exposed to bodily injury claims were also affected.

Catherine Thomas, senior director, said: “The changes proposed in September’s draft legislation mean that in future, the discount rate will be set by reference to expected rates of return on a ‘low risk’ diversified portfolio of investments rather than ‘very low risk’ investments as is assumed in the current minus 0.75% rate. It is expected that the rate will be reviewed shortly after the legislation comes into force, and, thereafter, at least every three years."

The briefing also notes that if reforms outlined in the draft legislation are implemented, A.M. Best believes that the rate is likely to increase immediately, allowing insurers to reverse some of their recent reserve strengthening. In its announcement, the Ministry of Justice stated that based on currently available information if the new system were to be applied today the rate might be in the region of 0% to 1%.

To access a complimentary copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=265941.

A.M. Best is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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A.M. Best

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Source: A.M. Best