Motor insurers reacted with dismay after an unexpectedly large change in the discount rate used to calculate personal injury damages awards. The discount rate is used to calculate how much a victim would receive in interest on any amount awarded, and has stood at 2.5 per cent since 2001. The lower the rate, the higher the lump sum has to be at the start.
Some change had been expected because of the low returns on gilt stocks, but the new rate of minus 0.75 per cent is far more severe than anyone had been expecting and attracted criticism from the Association of British Insurers (ABI), which described the move as a "crazy" decision.
Insurance groups Admiral (ADM) and Novae (NVA) immediately pulled plans to issue full-year results, which were due on 1 March, while Direct Line (DLG), whose claims are calculated using a discount rate of 1.5 per cent, estimates that the impact of the move will reduce pre-tax profits by between £215m and £230m, while altering its Solvency II capital coverage ratio towards the top end of the target range of 140-180 per cent. In addition, the combined operating ratio (of claims as a percentage of premium income) is expected to deteriorate from around 93 per cent to 99 per cent - barely break-even. Admiral Group (ADM) expects the changes to cost between £140m and £175m, but expects to maintain its dividend payment. At Hastings Group (HSTG), results for the year ending December 2016 will now include a one-off charge of £20m, but it doesn't expect the rate change to have any material impact on profits in 2017. esure (ESUR) shares were up on the day of the announcement, thanks to its low-risk approach to underwriting. The group's reserve margin included an allowance of £2m for a change in the rate to 0 per cent, so the rate change will see a further net impact of just £1m.
Over the longer term, profits are not expected to be affected because inevitably premiums will have to rise. The ABI calculated that as many as 36m insurance policies could be affected, which could provide a boost for price comparison websites such as Moneysupermarket.com (MONY) if costs are passed on to customers. The changes are due to come into effect on 20 March. There is at least one olive branch with the news that the government is to launch a consultation on whether there is a better way to calculate the payments.
