Motor insurance market suffers significant underwriting losses in 2016 following Ogden impact

15 June 2017

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  • Motor insurance NCR fell to 109.0% in 2016, including 8.8% Ogden hit, following 100.5% result in 2015
  • £3.5bn cost to the insurance industry of Ogden rate change
  • EY predicts 103.3% NCR in 2017 with improvement to 100.2% in 2018 if Ogden review and whiplash reforms go ahead
  • Premiums, already at record highs, predicted to rise by further 9.0% in 2017 to offset Ogden rate change and IPT

The motor insurance market has reported significant underwriting losses in 2016, according to EY’s annual UK motor insurance results seminar. Following a 100.5% Net Combined Ratio (NCR) in 2015, there was a sharp fall to 109.0% NCR in 2016 following the review of the Ogden discount rate for personal injury claims.

Although the change to the discount rate was announced in February this year – it plunged from 2.5% to negative 0.75% - most insurers reflected the impact on outstanding claims in their 2016 figures. Without the Ogden rate change, NCR in 2016 would have been 8.8 points lower at 100.2%.

EY estimates the overall cost of the Ogden rate change to insurers and reinsurers to be £3.5bn across all lines of business, based on market announcements and its own calculations. Approximately £2.4bn of losses have been disclosed publically to date, following the 27 February decision.

The ongoing costs from the new Ogden rate, and the need for insurers to rebuild reserve margins released to offset it, will lead to further pressure on the NCR in 2017 and EY expects it to deteriorate 3.1% compared to the 2016 performance (excluding the Ogden impact).

Better news could be on the horizon for insurers if the promised whiplash reforms and a review of Ogden methodology materialise. If so, EY expects the market NCR to improve back to 100.2% in 2018, which will give insurers some welcome respite.

Tony Sault, UK General Insurance Market Lead at EY, commented: “The impact of the Ogden rate change to the motor insurance industry has been considerable at around £3.5bn. While a reduction was certainly on the cards, virtually no-one anticipated the extent of the drop.

“The general election result last week may have created additional uncertainty and insurers will be hoping that the Ogden consultation and reform of whiplash claims will remain priorities for the new Lord Chancellor and the Government.”

Premiums expected to climb a further 9.0% following Ogden jolt and IPT rise

Motor premium rates were already at record highs in Q1 2017 (£462) according to the Association of British Insurers premium rate tracker. However, rising reinsurance and claims costs due to the new Ogden rate, high repair cost inflation and the rise in insurance premium tax to 12% could cause consumer rates to increase by a further 9.0% in 2017 to £503, EY predicts.

Tony Sault concludes: “The impact of the Ogden rate change, together with the increasing cost of repairing ever more complex cars, will inevitably filter through to premium rates. For Ogden alone, the higher compensation now due for serious injuries means insurers will have to pay out around 9% more in future claims. This will translate into a £28 increase to the average cost of a comprehensive policy.

“Further effects will be felt next year when annual reinsurance cover for large claims come up for renewal. Young drivers will undoubtedly have to bear the brunt of the increase due to the disproportionate number of larger claims they cause. A fundamental review of Ogden and the Government’s proposed whiplash reforms are increasingly urgent for consumers and must not be abandoned in the aftermath of the general election.”