February 27, 2017 / 9:43 AM / 3 years ago

UPDATE 2-Britons face surge in motor insurance premiums after rule change

* Discount rate cut to -0.75 pct from 2.5 pct

* Means rise in lump sum payments for personal injury claims

* PwC says motor insurance to rise up to 75 stg a year

* Personal injury lawyers say change long overdue

* Admiral, Direct Line shares slide (Rewrites top, updates story with personal injury lawyer comment, updates shares)

By Carolyn Cohn

LONDON, Feb 27 (Reuters) - Britons will have to pay much more for motor insurance after the government announced new rules on Monday that will push up lump sum payments for personal injury claims.

The industry’s trade body described the change as “crazy” as it would lead insurers to further increase motor insurance premiums, which jumped 9 percent last year. The personal injury lawyers’ trade group, however, said it was “long overdue”.

Shares in Britain’s biggest motor insurers Admiral and Direct Line tumbled after the Ministry of Justice said the discount rate used to calculate lump sum payouts would be cut to minus 0.75 percent, from 2.5 percent - a much bigger reduction than the industry had expected.

The ministry expects the lower rate to force insurers to pay out more in cash to personal injury claimants to ensure that returns over their lifetime meet the awarded compensation.

The change will come into effect next month.

“The current legal framework makes clear that claimants must be treated as risk-averse investors, reflecting the fact that they may be financially dependent on this lump sum, often for long periods or the duration of their life,” the Ministry of Justice said in a statement.

The discount rate is calculated based on real yields on index-linked UK government bonds, but had not been changed since 2001 and so failed to account for a sharp drop in real yields, which are currently negative.

The Association of British Insurers, calling the move a “crazy decision”, said in a statement that motor and liability premiums would rise as a result. Consultants PwC estimated annual motor premiums would rise by 50-75 pounds on average.

That means higher costs for motorists, after premiums rose 9.3 percent last year due to tax increases, rising repair costs and whiplash claims.

However, the Association of Personal Injury Lawyers said in a statement that “people already coping with the most severe injuries have been deprived of the help and care they need for years”.

Barrie Cornes, analyst at Panmure Gordon, described the move as a “huge blow to insurers”.

Admiral estimated the net financial impact on 2016 reported profit at 70 million-100 million pounds ($87 mln-$124 mln).

Its shares were down 3.2 percent at 1,811 pence at 1035 GMT.

Direct Line said the new rate would reduce 2016 profit before tax by 215 million-230 million pounds. Its shares fell 7.8 percent to 336 pence, making it the worst performer in Britain’s blue chip FTSE 100 index.

Shares in mid-cap motor insurer Esure, however, were up 3 percent at 214 pence, recovering initial losses after the company estimated the net impact of the rule change for 2017 would be 1 million pounds.

The change will also affect Britain’s health service. The government has committed to making sure there is enough money to cover changes to hospitals’ clinical negligence costs, the justice ministry said.

Mid-cap insurer Hastings said the change would lead to a one-off pre-tax charge of 20 million pounds in its 2016 results.

Its shares were unchanged at 232 pence.

The change will become effective on March 20 although the Ministry of Justice said that in coming months it would also consult on whether this was the appropriate way to calculate the rate. ($1 = 0.8050 pounds) (Reporting by Carolyn Cohn; Additional reporting by Esha Vaish in Bengaluru; Editing by Rachel Armstrong and Susan Fenton)

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