UK Insurers in Financial Crisis Insolvency Looms

Paul Robertson, Managing Director of Midway Insurance and 1st Sure Flats explains

Like me you may have left school believing that banks and insurance companies know what they are doing. The events of 2007 probably shattered the former and the events of 2017, may indeed for most, shatter the later. But for once it may be difficult to blame UK insurers for the crisis that lies before them. Naturally you have seen this reported nationally, or have you?

Even the most avid readers of the insurance press are likely to have taken an initial interest of the reforms to the Ogden discount. And when it was announced that this had moved from 2.5% to minus 0.75% it probably didn’t sound particularly relevant. So why am I predicting you motor insurance will increase by 15% this year and how does this affect block insurance?

The so called Ogden Tables are a set of actuarial tables used to calculate lump sum payments in personal injury and fatal accident claims and are unofficially named after Sir Michael Ogden QC, who acted as chairman of the first four editions. The decision of the Lord Chancellor to revise the discount rate has proved to be highly controversial within the insurance industry, which is in freefall panic over what seems like a small factor of change.

The reality is immense.  A 30 year old working man on a modest income who was fatally injured and requiring significant health care that would have been awarded a lump sum payment of circa £2.7 Million prior to the change, will now be awarded in the region of £6.3 Million. So how did we get in this mess and why such a rapid adjustment?

Personally I strongly believe that the insurance industry has a reasonability to treat genuinely injured persons with respect and make consummate payments where appropriate. However, I would strongly challenge such a dramatic change in understanding of the quantum of such payments. How did the Lord Chancellor fail to overlook this for so long or were insurers complicit by keeping quiet? How about claimants paid lump sums recently that will now learn how much more they could have received after this change? Overnight UK insurers have an unbudgeted liability of £2 Billion and as customers we will all need to pay for this.

Classes of insurance with high liability exposures will be most affected. I have already predicted this will increase motor insurance premiums by 15% but this is only the tip of the iceberg. Liability heavy trades will be most affected and that includes the housebuilders we so desperately need to build more homes. In theory block insurance shouldn’t be badly affected but is that really going to be the case. Probably a well-positioned and balanced insurance company should only need to increase rates by 1% on blocks of flats but as always it may not be that simple. The market is currently highly competitive to the point of rates being held artificially low and mainly this is driven by smaller insurers with lower credit ratings. These are the insurers that may be the worst affected and this could have significant repercussions for the whole insurance market.

So who are these insurers and why does this matter?

Typically they are smaller insurers who historically distributed motor and household insurance through insurance brokers. With the more recent swing to these products being purchased online, many of these smaller insurers have diversified into small commercial insurance and this includes insurance for block of flats. The challenge these smaller insurers will now have is that their cashflow and reserves will be affected. Possibly some of these will want to change the balance of the risks they write which could include property owners and block insurance. The challenge for them is that to do so they probably need to buy business in by being cheaper with a view to put their rates up when they have increased market share. But they are unlikely to be able to afford to do this as this latest bombshell comes on the back of the need to increase their solvency as a result of last year’s regulatory requirements.

History tells me that insurance premiums always increase dramatically when re-insurers increase their rates. A small increase in re-insurance rates can have a dramatic impact for the customer. Major re-insurers have already reserved significant sums of money as a result of Ogden and as such it is hard to imagine that reinsurance costs will not rise later this year, when insurers renegotiate their treaties. If this happens then premiums will be forced up. For smaller insurers the impact is normally larger and again it is these smaller insurers that have kept the block insurance market so competitive. 

Theoretically Ogden should have minimal impact in respect of block insurance but personally I am not so sure. That said the dynamics of the insurance market are very complex and difficult to predict. Significant readjustment of premiums are normally caused by major disasters or insurer incompetence. Most significant for me is that some insurers could be in significant financial trouble, even to the extent of potential insolvency. I would not be surprised to see the long term consequences resulting in some smaller insurers disappearing, thus reducing competition. Does this mean the end of the recent culture of shopping around every year, resulting in lower premiums, will come to an end? Only time will tell how Ogden will affect the long term of block insurance but with more money needed to fund the UK insurance pot, insurers will need to increase premiums just at a time when insurance premium tax is due to rise again.

Of course I also naively also left school believing that governments knew what they were doing! 

Paul Robertson is MD of Midway Insurance and 1st Sure Flats Tel: 0345 370 2842