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QBE takes $85 million hit from UK rate change

QBE has warned a smaller-than-expected change in the interest rate used in UK personal injury calculations will have a $US60 million ($85 million) impact on claims liabilities.

The UK Government last week changed the key figure, known as the Ogden rate, from minus 0.75% to minus 0.25%, but the move fell short of industry expectations.

The discount rate reflects the return that personal injury claimants can expect to receive when they invest compensation funds. A lower rate means a higher payout by insurers.

“As previously disclosed, QBE has been using a discount rate of 0.25% for the purposes of determining Ogden related lump sum payments,” the company said in a statement to the Australian Securities Exchange today.

Adoption of the minus 0.25% rate would result in the announced one-off increase in the group’s net central estimate of outstanding claims liabilities.

The new rate level was also not allowed for in QBE’s targeted combined operating ratio range of 94.5% to 96.5% for this year, outlined in the February results presentation.

Ratings agency AM Best says some insurers in the UK have been reserving conservatively, while others had been taking a more speculative approach and assuming a rate of zero to 1%.

“The alteration is likely to have a minor one-off earnings impact on some companies through strengthening or release of reserves,” Director Analytics Timothy Prince said.

QBE said the impact of the change would be reported as an adjustment in its first-half and full-year results.

The Association of British Insurers (ABI) says the negative rate is “a bad outcome” for insurance customers and taxpayers.

“A negative rate maintains the fiction that a claimant and their representatives will knowingly choose to invest their damages in a way that would guarantee losing them money,” ABI Director-General Huw Evans said.