Common sense will eventually prevail on the Ogden discount rate according to Aviva's chief executive Mark Wilson.
Speaking to journalists this morning following the release of the group's final year results, Wilson said the rate change from 2.5% to -0.75% was a "disjointed piece of legislation" but had confidence the government would come up with a more sensible methodology sometime soon.
"The government has promised an urgent review and they need to. Around the world I haven't seen anyone use a negative rate like this, it makes no financial or logical sense. I believe common sense with prevail and the government will come up with a sensible methodology."
After the rate change Aviva announced an IFRS profit hit of £385m ($468m). Today it revealed that this rises to £475m for operating profit, but that this was removed by considering the rate change as an exceptional item.
Although stressing the government's promise of an urgent review, Wilson said he did not know precisely when another rate change would come and said it would be hard to estimate a future figure. He highlighted that for now, because Aviva has a larger scale and better diversification than monoline motor insurers, the rate change did not have a meaningful impact on capital, dividends or share buybacks.
The group's solvency coverage ratio climbed to 189%, 9 percentage points higher than final year 2015.
Asked by how much the cost of motor reinsurance will go up as a result of the negative Ogden rate, Maurice Tulloch group chairman of general insurance said that it would be about a 40% to 60% increase on the £4.83 Aviva currently spends on reinsuring each vehicle. He said this reinsurance cost increase would however be much more painful for monoline motor insurers.
"Our casualty – including motor – retention is about £10m, most of the market is between £500,000 and £3m. For these insurers the reinsurance cost per vehicle is between £50 and £70. So the secondary impact on Aviva will be pretty minor."
Meanwhile, asked about internal model changes this year, Tulloch said that Aviva will be applying to use a dynamic volatility adjustment (VA) for its French business in order to stay on a level playing field with insurers that have approval for this in the French market.
A dynamic VA allows internal model firms to anticipate the benefit of the VA during times of market stress.
Currently the UK regulator does not allow a dynamic interpretation of the VA but the French regulator does. Tulloch said the reason a dynamic VA had not been approved so far was not down to opposition from the UK regulator.
