Ogden rate change dents insurers
London-listed insurers were under pressure on Monday after the Ministry of Justice said it was changing the Ogden discount rate used to calculate compensation for personal injuries to -0.25% from -0.75%.
The discount rate reflects the return that personal injury claimants can typically expect to receive when they invest their compensation, with a lower rate leading to higher insurance costs. The industry had been expecting a bigger reduction.
Hastings, Direct Line and Admiral all saw their shares drop on news of the change, which will be implemented on 5 August.
Huw Evans, director general of the Association of British Insurers, said this was a "bad outcome" for insurance customers and taxpayers that will add costs rather than save customers money.
"A negative rate maintains the fiction that a claimant and their representatives will knowingly choose to invest their damages in a way that would guarantee losing them money," he said. "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."
On 27 February 2017, the then Lord Chancellor reduced the discount rate used to calculate compensation for serious personal injuries from 2.5% to -0.75%. A review of how the rate should be set in future was then initiated by the government.
Russ Mould, investment director at AJ Bell, said: "Being at the mercy of the government and/or regulators is never a great place to be, as shareholders in insurance stocks are learning to their cost.
"New rules governing how much people can claim in damages after serious accidents will reduce how much insurers have to pay out, but, crucially, not as much as investors had hoped.
"Essentially a 2017 decision to drastically reduce the assumed returns claimants can earn on a lump sum has been walked back a bit but the industry’s disappointment in today’s outcome is still palpable. Analysts had certainly pencilled in a more favourable settlement.
"This shows how difficult it can be to second guess a regulatory outcome. It also feels like the last thing general insurance businesses needed.
"They are already facing increased competition, rising claims and the need to hold more capital to meet future claims.
"At the very least recent developments may put the brakes on the generous dividends these firms have paid in the past, particularly when you consider an FCA probe could place further pressure on premiums as the difference between what new and existing customers are charged is challenged.
"Putting your trust in the income from the insurance sector increasingly looks like an accident waiting to happen."