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11/8 M97/February 2018 Reinsurance

• Whether the insurer provides coverage for any fleets or other concentrations of vehicles at any one
location.
• Detailed loss statistics would be required on a triangulation basis and it should be clear whether
these loss figures contain any allowance for IBNR.
• The reinsured’s approach to periodical payment orders (PPOs) to include an explanation of how it
reserves for the corresponding claims (present and future).

B4B Proportional treaties
If the application for cover relates to a proportional treaty the following information would be needed:
• GWP or similar key figure for past ten years.
• Run-off triangles on accident year basis over same period, showing paid and outstanding claims.
• Comprehensive description of gross cost structure including average broker commission and
internal costs.
• Deductions from original premium to be met by the reinsurer.
• Costs of any XL for common account.
• Loss ratio for five past years and predictions for at least the next two years.
• Risk profile.
• Personal injury discount rate/Ogden rate.
Personal injury discount rate/Ogden rate
The personal injury discount (or ‘Ogden’) rate applies to the process by which damages paid to seriously injured
individuals, in relation to future losses and expenses, are adjusted to reflect the fact that those damages are received
in advance of the losses and expenses being paid because the funds are invested to generate a return.
On 27 February 2017, the Lord Chancellor announced changes to the discount rate used to calculate personal injury
claims. It has been reduced from 2.5% to –0.75%, with effect from 20 March 2017. This implies that the
Government expects that a claim recipient investing the damages settlement over their remaining life would get a
negative return on investment, and the insurer must top up the expected loss. Reference copy for CII Face to Face Training
This issue is of particular interest to liability and motor insurers. The change in discount rate immediately inflated
reserves and the cost of lump sum payments made to claimants as insurers were forced to re-assess each open
claim file in the light of the new discount rate. The cost of this change is being met primarily by the reinsurance
industry as motor insurers and most liability insurers have reinsurance protection. However, in the longer term
reinsurance premiums will rise and the cost of this increase will be passed down to policyholders.
Following the reduction of the discount rate for personal injury claims, the UK motor market net combined ratio
(NCR) deteriorated from 100% in 2015 to 109% in 2016. EY estimated the overall cost of the Ogden rate change to
insurers and reinsurers to be £3.5bn across all lines of business. A consultation was held following the unexpected
cut and in September 2017 the UK Ministry of Justice announced that a new rate of between 0%–1% would be
recommended to Parliament. It is presently unclear when this change will be decided and take effect, however, such
a change will have a positive impact on insurers’ NCRs. Students should monitor the situation and review the
insurance industry’s estimates of the aggregate reserve reductions and the proposed scale of any resultant premium
reductions if and when the rate changes.

B4C Non-proportional treaties

If the application for cover relates to a non-proportional treaty the following information would be
needed:
• Vehicles with sums insured exceeding 50%, 75% and 100% of the deductible.
• Maximum possible known accumulation for MOD.
• General loss information.
• Average claims expenditure for each vehicle category which would include privately owned motor
vehicles, taxis, buses, and so on.
• Information on individual claims FGU, especially those which are, or have the potential to be, subject
to a PPO.
• The price or wage indices used to develop the cost of claims.
• Information on the reinsurance required in relation to treaty structure and layering.
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