How Much Could Rates Fall Following Ogden U-Turn?

The Government’s decision to review its controversial Ogden Rate hike after just six months has far-reaching implications for motor insurance pricing, our latest research suggests.

Assuming that the increases we saw in March and April would be proportionally revised, and with immediate effect, we estimate rate moderation of between 1.3% and 3.1% within two months. It is, of course, a significant assumption.

While some insurers have already pledged to return all potential savings to consumers, it will be some time before any market-wide response becomes clear. This is for several reasons.

First, we don’t know when any revision will take place. We are only at the proposal stage, and based on the Government’s current legislative agenda, it won’t likely be any time soon. However, there is the possibility an adjustment could be applied in advance; that alone could prompt insurers to start making moves.

Second, there are other pricing factors at work, and cascading effects, not least reinsuring purchasing arrangements as highlighted by Admiral chief executive David Stevens last month.

Third, recent history also tells us the market is not aligned on the issue, at least from a rating perspective. Our latest Car Insurance Price Index shows a varied response — both before and after the March raise — and it seems safe to assume a similar reaction, particularly given the current level of uncertainty.

Fourth, we don’t know what the revision will be. The Government has posited a range of scenarios which involve adjusting the negative 0.75% rate to between 0% and 1%.

Looking at the mid case of a 1.25% increase to 0.5%, we see a fall of 1.3% in the first month after the revision, rising to 2.2% after the second.

1.25% increase in Ogden Rate to 0.5%

The high case in our model, upping the discount rate to 1%, reflects the low-end of market consensus pre-Ogden — a cut from 2.5% to between 1 and 1.5%.

1.75% increase in Ogden Rate to 1%

Splitting out the data by age group, we see the largest potential fall, at least in percentage terms, for the over 65s (4.1% over two months in a net revision scenario to 1%), followed by people aged 40 to 49 (3.5%). This is to be expected as these segments’ premiums are already the lowest, and are therefore most heavily impacted by any rating change.

As we move into this uncertain future, insurers should keep a close watching brief while waiting for the first proverbial horse to bolt. As with the initial hike, there will likely be opportunities to price for both acquisition and profitability, but timing will be key.