Shares in insurers suffer
New claims payments to hit car insurance
Direct Line and Admiral were among those hit as insurers said premiums would need to rise by up to £75 to meet higher compensation payments.
Analysts were already expecting a cut in the Ogden Rate which is used to calculate payments to victims of car accidents based on the return any money paid out can earn when it is invested. The lower the Ogden rate, the bigger the lump sum that insurers must pay out.
Russ Mould, investment director at AJ Bell, said: “The consensus was looking for a drop to 1% from 2.5%, the figure set back in 2001. The actual reduction announced by the Government takes the Ogden Rate down to -0.75%.
“This will be a nasty shock to most, but not all, of the big insurance firms in the FTSE 100 and FTSE 250, some of whom may now struggle to meet the profit and dividend figures expected of them by analysts for 2017 and beyond.
“This will be of particular concern to income hunters who have latched on to the yields offered by Direct Line and Admiral – both are among the three highest yielding stocks in the FTSE 100, based on 2017 forecasts.”
The Department for Justice said: “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.”
Barrie Cornes, an insurance analyst at Panmure Gordon, described the move as a “huge blow to insurers”.
Direct Line said the new rate would cut its 2016 profit before tax by up to £230 million. Its shares fell almost 7%.
Admiral estimated the move would cost it between £70 million and £100m. Its shares were 4% lower in early trade.
Esure managed to avoid the worst of the impact, its shares actually up almost 4% after calculating that it would suffer only a marginal effect.
Hastings expects a one-off pre-tax charge of £20m. Its shares fell 0.5%.
The Association of British Insurers described the move as a “crazy decision”.
Carolyn Fairbairn, CBI Director-General (right), said: “The unexpected, significant cut to the discount rate is a setback for the UK’s world-leading insurance industry. It subjects insurance companies to a large and sudden shock at a time when stability and predictability should be prioritised.
“We support a fair framework for claimants and defendants, but the way in which the discount rate is calculated is flawed, as it is based solely on short term market movements.
“It’s important that the planned consultation happens straight away, to make sure long term economic factors are included in the calculation of the discount rate.
‘From the increasing strain of business rates to questions over the UK’s future relationship with Europe, the cumulative burden of challenges is weighing on UK companies. Now more than ever, it is critically important that firms have a stable policy framework to in which to grow, invest and drive prosperity for all parts of the UK.”