The proposed change to Britain’s Ogden rate is being welcomed by the insurance industry, analysts said.

The government's new proposal could result in a rate of between 0% and 1%, the government said. The proposal still needs to be approved by Parliament.

The Ogden rate, which is used to calculate lump-sum payments in bodily injury claims to cover long-term care costs or lost earnings, was cut to negative 0.75% from 2.5% earlier this year, the first time the rate had been changed in 16 years.

The lower rate would require insurers to make larger lump sum payments on personal injury claims because it assumes lower annual investment returns for that lump sum. 

John Ludlow, chief executive of London-based risk manager industry group Airmic Ltd., said in statement that “we welcome the proposed reforms as a much fairer outcome for insurers and policyholders.”

“The changes reflect a more realistic view of investment potential and the proposal to review the rate more regularly makes good business sense,” the statement said. “We are grateful that the government has taken swift action to consult with the insurance industry and act on its advice.”

S&P Global Ratings Inc. analyst Tatiana Grineva, based in London, said the proposed change in the Ogden rate is a positive development for insurers.
 
“We have no final decision at this moment,” she said. “It still has to go to parliament, but there are indications that the current rate should go back to somewhere between zero and 1%, which would obviously be less punitive for insurers.”
 
Ms. Grineva also said the current discount rate was out of date.
 
“The last time it was reviewed was about 15 years ago and 2.5% was well above the current interest rate level in the U.K.,” she said.

“After the Ogden rate changes were first announced in the first quarter of the year for the U.K. motor excess of loss business, we saw significant double-digit rate increases for reinsurance contracts — and by significant double-digit rate increases, we mean in many cases an often north of 40% increase on the reinsurance treaties that were being written,” said David Masters, London-based director of EMEA Financial Services for S&P Global Ratings.
 
Mr. Masters added that “clearly, our view is that the majority of losses from the Ogden changes would have been borne by the reinsurance community, therefore to the extent that there are revisions to the Ogden rate which move back in the favor of the insurance and reinsurance market, I think it would be fair to say that we would expect the majority of the benefits to accrue to the reinsurers.”

The change in the Ogden discount rate was already affecting insurers and reinsurers profitability. Several insurers and reinsurers announced charges in their quarterly results to increase loss reserves as a result of the change.

U.K.-based Fitch Ratings Ltd. said in a statement that “the planned reforms of the Ogden discount rate will partly reverse the earnings hit caused by the previous change to the rate in February.” 

“However,” the statement continued, “the change could also increase insurers' exposure to longevity risk as a result of greater propensity for claimants to take the periodic payment orders alternative.”

Catherine Thomas, London-based senior director of analytics of A.M. Best Co. Inc., said “it is expected that the rate will be reviewed shortly after the legislation comes into force and, thereafter, at least every three years.” 

“If reforms outlined in the draft legislation are implemented,” Ms. Thomas said in an email, “the rate is likely to increase to between 0% and 1%, allowing insurers to reverse some of the recent reserve strengthening. The proposed reforms have been broadly welcomed by the industry. In particular, the commitment to review the rate more frequently means that future changes will be less dramatic than that announced in February.”

Tony Sault, London-based U.K. general insurance leader for Ernst & Young Global Ltd., said in statement that “we think that motor and liability insurers will welcome the revised proposals – not only because of the cost impact, but also because of the promise to build in a three-year review process which will hopefully avoid the impact of large rises going forward.”

Mr. Sault said EY had estimated that the changes to the discount rate would cost the insurance industry an additional £3.5 billion ($4.62 billion) and add 6.5% to customer premiums “and we found these numbers were closely borne out in practice.” 

“We believe the new proposals, which the government expects to imply a real rate of 0% to 1%, will have a significant impact on these costs,” Mr. Sault wrote. “A revision to 0% could reduce these costs by one-third, meaning reserve releases of £1.2 billion (roughly $1.6 billion), while a change to 1% could reduce this by two thirds, meaning up to £2.5 billion (roughly $3.2 billion) could be saved by insurers and reinsurers compared to their current booked position.”