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Shares in some of the UK’s biggest insurers are suffering this morning after the insurance industry and the NHS said they were braced for larger personal injury compensation payouts following a major change to the way large insurance sums are calculated.
The government on Monday said the discount rate, used to calculate personal injury compensation payments, would be lowered from 2.5 per cent to minus 0.75 per cent.
Previously, a payout would have been reduced slightly to reflect the fact that the receiver would earn income on the sum – in some cases intended to support them for the rest of their life. But now, instead of a reduction, insurers will have to pay more than the total agreed by the court.
The Association of British Insurers described the decision as “crazy”. Director general Huw Evans added:
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.
In a statement to the London Stock Exchange, Justice secretary Liz Truss said the government would ensure “that the NHS Litigation Authority has appropriate funding to cover changes to hospitals’ clinical negligence costs”. She also said a consultation on future discount rate reform would be brought forward to before Easter.
The law is absolutely clear – as Lord Chancellor, I must make sure the right rate is set to compensate claimants. I am clear that this is the only legally acceptable rate I can set.
The new discount rate, which has been unchanged since 2001, will come into effect on March 20.
Shares in Admiral Group fell as much as 9 per cent at the open, with Direct Line down 8 per cent and Esure slipping 2 per cent, though they all recovered somewhat in later trading.
Admiral said on Monday its expects its profits for last year to be between £70m and £100m lower following the change and that it is postponing reporting its annual results for 2016 from March 1 to March 8, “[i]n order for the impact of the new rate to be reflected”.
However it added that as it expects future premiums to be repriced to reflect the lower rate, “there will be no significant impact on future business and its profitability after the change.”
Esure said its low risk approach “materially reduces the Group’s exposure to large claims costs and therefore the impact that a movement in the discount rate has on its financial performance and solvency position.”
It had previously factored in a reduction of the discount rate to 0 per cent, meaning it only expects a net impact of £1m this year.
Direct Line Insurance Group said it would “update the market later today regarding implications of this change.”