Ogden rate: what insurers can do now
We're finally seeing some progress from the government on the Ogden rate, following the announcement this morning from the MoJ. The new rate is likely to fall within the range of 0% to 1% (based on current market conditions) so it's another significant movement.
Today's announcement will be welcomed by insurers on many fronts. But key uncertainties remain. There's a big difference between a 0% and a 1% rate. And the proposed change will still make as much as a 7-figure difference to the value of certain individual claims.
Three key changes
Here are three key changes and what they might mean for insurers:
1. The Ogden rate will be based on “low risk” rather than “very low risk” investments
Insurers are likely to welcome this important change of principle. This better reflects how claimants have actually been investing their compensation awards.
2. More regular review of the Ogden rate, at least every three years
A system of regular review will hopefully help with forward planning. However, a lot depends on whether the rate will be linked to market indicators, allowing movements to be partially foreseen and potentially hedged with an effective investment strategy. If instead there is still a strong political element to the decision, things will be far less predictable.
3. Introduction of an expert panel to help the Lord Chancellor in reviewing the Ogden rate
Insurers will want to know who will be represented on this panel and what its remit will be. Will it focus purely on economic factors or also cover policy issues? And will its findings be made public, providing greater clarity, or will they be for ministers’ eyes only?
What can insurers do in response?
Pricing strategy
Insurers will be considering whether to take confidence from today's announcement and make pre-emptive rate reductions, stealing a march on the competition. They will want to balance this against the remaining uncertainties. A 1% rate would be largely in line with how large claims are settling currently (notwithstanding the official -0.75% rate). But a 0% rate would represent an genuine increase in claims costs.
Preparing to update case reserves
Learning from recent experience, many insurers now have systems in place to update case reserves efficiently and consistently in response to further Ogden rate changes. It's important to be able to react to such changes as rapidly as possible - the current proposed change will make as much as a 7-figure difference to the value of the largest claims.
Engaging with XL reinsurers
It's never been more important to stay close to your XL reinsurers to ensure that you get the fairest possible deal at the next renewal. Anecdotally, some reinsurers had already been discussing indicative rates based on say a 1% Ogden rate. Again, they'll be concerned with some of the uncertainties in today's announcement, and may be treading carefully on pricing until there is more clarity.
Considering impacts on capital and reserves
One of the big issues to consider is PPO propensity - the assumption for what proportion of large claims will settle as PPOs. Our research suggests many insurers have reduced their PPO propensity assumptions by as much as three-quarters this year, reflecting the fact that lump sums are a lot more attractive at a -0.75% Ogden rate. In theory, the propensity assumption should now be revised back upwards, to an extent. However, very few new PPOs have settled this year and lump sums have typically been settling based on a 1% rate. So, some might argue that this is an assumption that can be held firm. I will be interested to see what firms do on this front.