LONDON (Reuters) - Britain will change the discount rate used to calculate compensation for personal injuries to minus 0.25% from minus 0.75%, disappointing insurers who were hoping for a higher rate to limit the money they must set aside to cover payouts.
The decision by the ministry of justice follows a review in response to lobbying from motor insurers, whose profits were hit by the move to cut the so-called ‘Ogden Rate’ from 2.5% in 2017.
UBS analysts said insurers had been expecting a rate of around 0.5% and had moved to setting their reserves based on a rate of 0%.
The lower rate chosen by the ministry means insurers will have to set aside more money than expected for lump sum payments for people seriously injured in car crashes, potentially denting their profits and pushing up drivers’ premiums.
“This is a bad outcome for insurance customers and taxpayers that will add costs rather than save customers money,” said Huw Evans, director general of the Association of British Insurers.
“This will remain the lowest discount rate in the Western world, leaving England and Wales an international outlier at a time when we need to boost our attraction to international capital,” Evans said.
Shares in British motor insurers Admiral (ADML.L), Direct Line (DLGD.L), whose brands include Churchill, Green Flag and Privilege, and esure, Hastings (HSTG.L) and Sabre (SBRE.L) all fell on Monday, before recouping losses. Analysts see Admiral and Direct Line as most affected by the new rate.
The discount rate corresponds to the return victims should expect from investments. A lower Ogden rate requires insurers to make larger lump sum payments on personal injury claims, as it assumes lower annual investment returns for those amounts.
The Association of Personal Injury Lawyers welcomed the new discount rate, which will be introduced on Aug. 5 and reviewed again within five years.
“The government has faced sustained pressure from the insurance industry to set a rate which would not be appropriate for injured people, who should not be forced to take any risk with their investments,” president Gordon Dalyell said.
Insurer LV= said claimants would remain over-compensated and expected the rate to be challenged again at the next review.
The rate takes into account returns available to investors and investments made, allowances for tax, inflation and investment management costs, as well as wider economic factors, the ministry said in a release.
Car insurance premiums increased by 3.5% (27 pounds) in the second quarter of 2019, with UK motorists now paying 789 pounds on average, 37 pounds more than they were paying this time last year, according to the latest Confused.com Car Insurance Price Index in association with Willis Towers Watson.
Additional reporting by Simon Jessop and Noor Zainab Hussain; Editing by Rachel Armstrong and Mark Potter