Insurance companies took a hit in the aftermath of the lord chancellor’s decision to recalculate the rate at which personal injury settlements are discounted, with share prices falling amidst profit warnings.
Direct Line's share price lost 7.16% in value, ending the day trading at 338.5p a share.
The group had estimated that the government’s decision to cut the rate from 2.5% to minus 0.75% for personal injury compensation would reduce profit before tax for 2016 by between £215m and £230m after reinsurance recoveries.
The firm had previously disclosed in its 2015 annual report that its claims liabilities at that time were calculated using a discount rate of 1.5%.
Admiral, meanwhile, saw its share price fall 2.46% in value and postponed the announcement of its results for 2016 – due out this week – by a further seven days.
The company said the majority of the financial impact in respect of premiums earned during 2016 and prior years will be reflected as a one-off charge against 2016 second half profits.
The total net financial impact of all claims settling at the new rate is estimated at between £140m to £175m. The estimated net financial impact on 2016 reported profit is £70m to £100m.
Insurers’ anger at the decision, which lord chancellor Liz Truss described as the ‘only legally acceptable’ option available to her, was summed up by its representative body, the Association of British Insurers (ABI).
Huw Evans, director general of the ABI, said the government had shown an ‘utter disregard’ for the impact it would have on consumers, businesses and the wider operation of the insurance market.
‘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 has revealed it will lobby for a law change on the calculation of the discount rate to be included in the Prison and Courts Bill, which was laid before parliament last week. The rate is set to change from 20 March but insurers say reform ‘cannot wait until Easter’.
The insurance lobby's argument was largely favourably covered by the media. The BBC had the story at the top of its news page for much of Monday, with the headline ‘Car insurance "set to soar" after ruling’.
The Guardian led with the NHS facing a £1bn annual bill after a ‘reckless’ change to injury payouts, while the Times taking the same angle. The Telegraph headline quoted the ABI saying the decision was ‘crazy’, while the Evening Standard said an insurance payouts shake-up would ‘land NHS with £1bn bill and hit drivers’.
Insurers hit by share price falls in aftermath of discount decision
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