Change to UK compensation laws a headache for QBE

The pains continue for QBE after Britain dramatically changed the rates used to calculate compensation for injuries.

QBE faces an explosion in claims costs.

The headaches continue for QBE, following a solid annual ­result on Monday, after the British government dramatically changed the rates used to calculate compensation for injuries, which will result in an explosion in claims costs.

Britain’s Justice Minister and Lord Chancellor, Liz Truss, on Monday night announced a deep cut to the Ogden tables, the discount rate used to calculate compensation awards for serious personal injuries sustained through car crashes or botched surgery, slashing the discount rate to negative 0.75 per cent, from 2.5 per cent.

QBE, which this week booked its best underwriting profit in six years, was planning for a reduction of 1 per cent in the statutory rate. The 325-basis-point cut now puts QBE’s plans out by 225 basis points, and has sparked a $160 million blowout in the group’s outstanding claims liabilities.

“As a consequence, industry-wide price increases are expected in affected classes,” QBE said in a short statement.

The move also puts at risk QBE’s targets for the financial year, announced on Monday. This deep cut to the Ogden ­tables “was not allowed for in QBE’s 2017 targeted combined operating ratio range” of 93.5-95­ ­per cent.

A pay cut of $550,000 for QBE chief executive John Neal after he failed to disclose a relationship with a company secretary threw a pall over the group’s otherwise solid profit results on Monday.

The company has also been hammered by speculation over the sudden departure of former chief operating officer Colin Fagen, which it admitted after questioning by The Australian. Mr Fagen was weeks earlier appointed president of industry body the Insurance Council of Australia, a post that he will no longer be taking up.

Mr Neal addressed the Ogden changes ahead of the British announcement. “Sadly, any change has zero benefit for claimants, but necessarily will require an increase in claims reserves, and therefore our hike in price to the detriment of the UK customer,” Mr Neal said.

Association of British Insurers director Huw Evans said the move by the British government was a “crazy decision”.

“Claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK,” Mr Evans said.

Citi analyst Nigel Pittaway said the slashed discount rate was “over and above what QBE has allowed for”. “Taking QBE’s disclosures literally, this implies a further $US118m pre-tax hit not included in guidance,” Mr Pittaway said.

But he said the moves to increase premium pricing should benefit QBE in future periods.

Deutsche Bank’s British analysts said they believed insurers would have to increase pricing a further 2-3 per cent for new business and a bit more on the back book.