UK insurance stocks slide on Government's new rules on personal injury claims

The Ministry of Justice is cutting the discount rate used to calculate lump sum payouts to minus 0.75 per cent, from 2.5 per cent, a much bigger cut than expected

Shares in Direct Line fell more than 8 per cent while shares in Admiral declined more than 4 per cent

Shares in UK insurance groups Admiral and Direct Line fell sharply on Monday, hit by news that the Government is drastically hiking the amount that the insurance industry will have to pay for personal injury compensation claims.

In morning trading, shares in Direct Line fell more than 8 per cent while shares in Admiral declined more than 4 per cent.

The Ministry of Justice earlier announced that it was cutting the discount rate used to calculate lump sum payouts to minus 0.75 per cent, from 2.5 per cent, a much bigger cut than the industry had expected.

The industry consensus had been for a cut to not less than plus 1 per cent, according to Reuters.

The Association of British Insurers called the move “crazy”.

“To make such a significant change to the rate using a broken formula is reckless in the extreme, and shows an utter disregard for the impact this will have on consumers, businesses and the wider operation of the insurance market,” it added in a statement.

Mohammad Khan, UK general insurance leader at PwC, said that the move would have “significant adverse impact on motor insurance prices, while Simon McCulloch, a director at price comparison website comparethemarket.com, said that “the concern is that the discount rate change will see much of the money move from the pockets of motorists and into those of personal injury lawyers, who campaigned for it”.

Admiral estimated the net financial impact on 2016 reported profit at £70m to £100m and Direct Line said the new rate would reduce 2016 profit before tax by £215m to £230m, according to Reuters.