COMMENT: Ogden tables turned?
Written by Deborah Ritchie
Back in February, the Ministry of Justice unveiled a dramatic cut to the discount rate used to calculate lump-sum personal injury compensation from 2.5% to minus 0.75%, following a review of the Ogden tables. The unexpected change took effect from March and was the source of widespread concern across the industry, and began a narrative that included the British Insurance Brokers’ Association calling for urgent changes in the law used to set the rate.
Since the unwelcome announcement, insurers exposed to UK liability business – and motor insurers in particular – have been severely hit. Ratings agency AM Best noted in June that the impact of the change was far more severe than even it had expected, noting that insurers exposed to UK liability business were reporting sizeable one-off reserve charges. Some months later, the news of a redress to the discount rate understandably put an end to months of speculation and concern.
Following the announcement, partner at law firm Clyde & Co, Peter Walmsley said “common sense” had prevailed, adding that the last cut to the rate was calculated using a poor methodology and led insurance premiums to rise. And that while a rate of 0% would in their view still be too low, at least insurers will have more clarity on how the rate is calculated and how and when it is reviewed.
BIBA was next to applaud the Lord Chancellor’s proposals, echoing the need for a speedy end to the uncertainty brought about by the significant underinsurance risk and increase to premiums that February’s discount rate change caused.
These comments were echoed by Airmic, whose chief executive, John Ludlow, welcomed the proposed reforms, which he says will bring about a much fairer outcome for insurers and policyholders. The changes, he says, reflect a “more realistic view of investment potential, and the proposal to review the rate more regularly makes good business sense”, welcoming the government’s “swift action to consult with the insurance industry and act on its advice”.
Identifying a silver lining, Ludlow took the opportunity to suggest that the Ogden saga serve as a reminder to the government of the need for fully-consulted and coordinated policy moving forward. “While we are pleased with today’s outcome, we once again urge the government to ensure that any future legislative or fiscal changes are fully consulted and the potential for a cumulative impact on the insurance industry and UK plc is considered,” he suggested.
Head of financial services at Mazars and former CEO of Ecclesiastical, Michael Tripp, went further to suggest of a loss of focus in the process and the ultimate decision, which he believes has to be questioned against the current state of the market. “Just because the UK is going through a period of almost zero interest rates, and inflation is up nearly 3%, why should we rethink the actual rate? The real issue is that procedures to review Ogden have not been transparent or regular enough. It is right to correct this and if it had been in place, the sudden discontinuity seen at the turn of the year wouldn’t have happened, we would have been in the position to see adjustments over time.”
The risk of confusing the two issues he says requires further, open discussion, adding that society needs to be careful about confusing commercial interests and treating people properly, suspecting that the consultation response will not be the end of this particular saga.