Ogden rate U-turn boost for reinsurers

  • More realistic rate: Brad Kading, president of Abir

A change to the UK system to work out the amount of compensation paid out to accident victims could be worth hundreds of millions of dollars to several Bermuda reinsurers.

The British Government yesterday announced it was changing the method it uses for working out the so-called Ogden rate — a change likely to reduce the amount paid out in claims by insurers.

The rate is taken into account by UK courts when they make compensation awards. It estimates the return accident victims could make by investing the sum conservatively. Thus, the higher the discount rate, the lower the award would need to be.

Earlier this year, the UK sharply reduced the Ogden rate from 2.5 per cent to negative 0.75 per cent. The 325-basis-point decrease was effectively “a casualty catastrophe”, according to rating agency Standard & Poor’s.

S&P estimated the resulting global losses at between $6.5 billion and $9 billion, of which 80 per cent would be borne by reinsurers. In the first quarter, Bermudian reinsurers took a hit of $260 million from the change.

Companies including XL Catlin, Axis Capital, Argo Group and PartnerRe all announced impacts in the tens of millions of dollars and insurance premiums for policies to cover accidents rose.

Under the new system announced yesterday, the rate will be set according to “low-risk” investments, rather than the previously used “very low risk”. As a result the discount rate will rise to between 0 and 1 per cent, although the proposals still have to be approved by UK lawmakers.

Bradley Kading, president of the Association of Bermuda Insurers and Reinsurers, welcomed yesterday’s news. “It is a positive change, a more realistic discount rate,” Mr Kading said.

Huw Evans, director-general of the Association of British Insurers, welcomed the announcement, saying: “This is a welcome reform proposal to deliver a personal injury discount rate that is fairer for claimants, customers and taxpayers alike.

“The reforms would see the discount rate better reflect how claimants actually invest their compensation in reality and will provide a sound basis for setting the rate in the future.”