How can insurers respond to the Ogden rate changes?
Reading Time 3 mins
Rapid responses required to bottom line threats
In early 2017 the Lord Chancellor, Liz Truss, unveiled the long-awaited change to the Ogden rate, the rate at which large injury compensation figures are reduced to offset the fact that prudent claimants would be able to benefit from investment growth.
The rate shifted from 2.5% to minus 0.75% in a surprise move that horrified insurers. One of the UK’s largest personal lines insurer was said to have been affected to the tune of £175m, whilst others had to postpone declaring their financial results whilst they worked through the consequences of having to set aside far bigger reserves for large claims.
In light of industry reaction, the government agreed to carry out a further review. It had been widely expected that the new rate would be around 0% - 0.25% and insurers had started pricing their future premiums accordingly. It was therefore a further shock when, last week, the results of the review were unveiled, setting the revised rate at minus 0.25%.
Out of insurers who have gone public so far regarding the impact, Hastings has said that it will hit their profits by £8.4m, with other larger insurers expected to have felt even bigger consequences; AXA, LV= and The Association of British Insurers amongst others have gone on record to express their dismay.
The race is now on for insurers to correct pricing to reflect the new rate, but this will take a while to flow through in premiums.
In the meantime, what can insurers do to protect their immediate bottom line?
Within an insurer, most of the costs flow out through the Claims department, partly because of operating expense, but mainly due to indemnity: the cost of settling claims.
Most insurers will already have programmes of work looking at reducing these costs, but many require significant investment. Additionally, large insurers are prone to struggling with implementing change effectively, whether that is because of disjointed and under-resourced change functions, or risk aversion which discourages innovation and experimentation in order to affect improvements. Finally, insurers will typically incur a large proportion of their spend through a supply chain, where they may struggle to create opportunities for joined-up improved ways of working.
This latest challenge adds to the already broad mix of change activities which companies have to deal with. So how does one deal with such dynamic changes?
At Gobeyond Partners, we have found that a focus on human-centred design provides a strong platform for rapid improvement. By engaging all parts of the business in change, it becomes something that people drive themselves, instead of being the recipients of. In this context, that can mean the interactions between claimants and the insurer, insurers and third-party solicitors or accident management companies, or insurers and their supply chain partners.
One approach, which we have already introduced in partnership with a large UK insurer, is to create a Model Office environment within their Claims department. Front-line staff are upskilled to identify, design and test solutions with real customers, prior to rolling out to the wider business where service improvement or cost reduction can be rapidly scaled. Improvements are delivered quickly, within hours and days, rather than weeks and months.
This empowers and engages employees to deliver benefit to the business whilst reducing risk, as initiatives can be tested in a controlled environment, whilst assessing the operational impact on real handlers and customers.
More importantly, in the context of responding to Ogden, utilising this methodology creates a great sense of ownership between teams and as a consequence can deliver rapid, in-year benefits.