Fresh evidence emerged this morning of the hit to profits suffered by insurers following Liz Truss’s decision to alter the discount rate which calculates deductions from compensation payments to injured people.
Direct Line announced to the London Stock Exchange that the change from 2.5% to minus 0.75% has cut its pre-tax surplus for calendar 2016 by 38%, from £570.3m to £353m.
Chief executive Paul Geddes hailed 2016 as a ‘successful year’ nevertheless, while announcing a 5.4% rise in the final dividend. However, chief financial officer John Reizenstein told the Financial Times that, before the changes, the insurer was considering a special payout with its final results.
The disclosure comes amid speculation of a government U-turn on the rate. A delegation of insurer chief executives seemingly bypassed Truss to lobby chancellor Philip Hammond at a meeting in Downing Street within 24 hours of the change being announced. Claimant lawyers have told the Gazette they fear insurers will stall over settling claims while they wait and hope that the so-called Ogden Rate is revised.
Direct Line had made a provision in claims reserves anticipating that the rate would be changed to 1.5%. It has therefore had to increase this provision for all business earned up to 31 December, with the subsequent hit to profits. The company does not expect 2017 profits to be affected by the new rate.
The company also notes in its preliminary results today that the lord chancellor ‘has left open the possibility of further changes to the process by which the rate is set, and therefore to the rate itself’. It adds: ‘The group welcomes the consultation to consider options for reform, with a view to achieving a better and fairer framework for claimants and defendants.’
Direct Line also alludes to government plans to cut the volume and cost of ‘whiplash’ claims and ministers’ expectation that this will slash motor premiums by £40. The company says only that it ‘has been calling for reform in this area for some time and continues to work with government and industry bodies on how the reforms should be implemented’.
Direct Line shares have fallen 5% since the new discount rate was announced, but were flat this morning.
New discount rate dooms Direct Line’s special dividend as profits sink
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