Government cuts discount rate: Insurance sector says “crazy” decision will cost the industry billions
The UK's insurers were left reeling this morning after the government announced changes to a key insurance sector discount rate, costing them hundreds of millions of pounds.
Direct Line said annual profits for 2016 would be cut by up to £230m, while motor insurer Admiral estimated it will take a hit of up £100m and is to delay the publication of its annual results.
The discount rate, mandated by the Ministry of Justice and the reference to which insurers discount compensation on personal injury claims, is to be adjusted from 2.5 per cent to minus 0.75 per cent.
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The insurance sector has lobbied the government hard against a large downward adjustment with the Association of British Insurers (ABI) going to court to challenge the move.
A lower discount rate increases the up front value of claims.
The ABI lambasted the news, with director general Huw Evans labelling it "crazy". He 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.
Lord Chancellor and justice secretary Liz Truss said: “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."
FTSE 100 insurer Admiral said today it would need to delay posting its results from 1 March to 8 March in order to incorporate the impact of the decision into its annual figures.
Shares in Admiral dropped three per cent in morning trading, while Direct Line's stock was down 7.8 per cent.
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Many in the insurance sector have already provided for a downward move in the discount rate, which has been at 2.5 per cent since 2001.
But, said the ABI, there was likely to be a devastating impact on consumers.
"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. We estimate that up to 36m individual and business motor insurance policies could be affected in order to over-compensate a few thousand claimants a year," said Evans.
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.
Admiral said it expected total financial impact of the change at between £140m and £175m, it estimated the impact on its profits of between £70m to £100m. This, the insurer said, would not impact its expected dividend payout of 51.5p per share.