UK insurers hit back at 'crazy' personal injury rate change as share prices tumble

Insurance premiums are about to go up
Insurance premiums could be about to go up

UK insurers have attacked as "crazy" Government plans to change the way personal injury compensation pay-outs are calculated, a move that will wipe millions off the profits of the country’s largest insurance companies.

The Ministry of Justice announced this morning that it will cut the discount rate – a calculation used to determine lump sum compensation to claimants who have suffered life-changing injuries - to -0.75pc from 2.5pc.

The news came as a shock to the industry, which had widely expected the rate to fall to between 1.5pc and 1pc.

It will take effect from March 20, marking the first time it has been changed since 2001. The move will cost the insurance industry millions of pounds and send premiums higher for customers. The announcement caused shares across the sector to plummet by as much as 7pc.

Huw Evans, director general of the Association of British Insurers, which represents the insurance industry, called the move a “crazy decision” by the Lord Chancellor and Justice Secretary Liz Truss.

“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,” he said.

The ABI expects that up to 36 million individual and business motor insurance policies could be affected in order to over-compensate a few thousand claimants a year. 

“To make such a significant change to the rate using a broken formula is reckless in the extreme, and shows an utter disregard for the impact this will have on consumers, businesses and the wider operation of the insurance market,” Mr Evans added.

“We have repeatedly warned the Government that this could lead to very significant price rises. It is also a massive own goal that lands the NHS with a likely £1bn hike in compensation bills when it needs it the least.” 

The announcement has forced many listed insurers to make unscheduled announcements to the London Stock Exchange, with many having to delay reporting their financial results as they recalculate the hit they will take.

Admiral Group expects it will cost an extra £140m to £175m to settle all current claims as a result of the change. This will drain £70m to £100m from its 2016 profits. Shares in the company fell by 3pc.

Shares in eSure slumped by the same amount as it said the new discount rate would wipe £1m from its profits this year.

Direct Line, another insurer, said it was "disappointed" at the decision, which will reduce its pre-tax profits this year by between £215m and £230m. The insurer's capital coverage ratio – the measure of a company’s ability to meet its financial obligations - will also suffer. Shares in the company tumbled 7pc as a result. 

The discount rate is set by the Lord Chancellor and is used by courts to calculate future loss in personal injury cases.

When victims of life-changing injuries accept lump sum compensation payments, the actual amount they receive is adjusted according to what interest they can expect to earn by investing it.

Accordingly, in determining the compensation amount, courts apply a calculation called the Discount Rate, also known as the Ogden Rate, which is a percentage, now -0.75pc, linked to returns on the lowest risk investments, typically index-linked gilts.

The compensation award using the rate is meant to put the claimant in the same financial position had they not been injured, including loss of future earnings and care costs.

"The law makes clear that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on this lump sum, often for long periods or the duration of their life," said the Ministry of Justice.

Mohammad Khan, UK general insurance leader at PwC, said: "The Lord Chancellor's announcement on the Ogden rate was not anticipated by the insurance industry and is more than they were expecting.

"The announcement of a move to -0.75pc means many insurers will need to further increase their reserves, potentially impacting expected results for year-end 2017 for those who have already announced their results and year-end 2016 for those that have still to report. 

"Unfortunately, this announcement will have a significant adverse impact on motor insurance prices that drivers pay and also commercial insurance rates paid by small businesses.

"The announcement will also impact reinsurance pricing by pushing prices up for motor and liability reinsurance cover. This may impact the business models of  companies that rely on low layers of reinsurance who will be faced with much higher costs of doing business after they renew their reinsurance."

Simon McCulloch, director of insurance comparison website comparethemarket.com, said the rate change was "drastic".

"The concern is that the discount rate change will see much of the money move from the pockets of motorists and into those of personal injury lawyers, who campaigned for it," he said.

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