Personal injury payment rate to change in boost for insurance companies

Insurance premiums have risen after an unexpected cut to the rate in February

An outcry from insurers led to a government consultation on how the rate is calculated (REUTERS)

The Government plans to alter the rate used to calculate upfront personal injury payments, the Ministry of Justice said on Thursday, a move which will reduce those payments and insurance premiums.

Motor insurers’ profits were dented and insurance premiums have risen after the UK unexpectedly cut the rate, known as the Ogden discount rate, in February to -0.75 per cent from 2.5 per cent.

An outcry from insurers led to a government consultation on how the rate is calculated.

“Based on the evidence currently available, the government would expect that if a single rate were set today under the new approach, the real rate might fall within the range of 0 to 1 per cent,” the ministry said in a statement.

Draft legislation to make the change will go before Parliament on Thursday, it said.

The new rate would not be applied retrospectively, it added.

A lower rate requires insurers to make larger lump sum payments on personal injury claims, as it assumes lower annual investment returns for that lump sum. The rate is currently linked to the yield on index-linked gilts.

A subsequent government consultation has led to the plans to alter the calculation method for the rate.

The Association of British Insurers said the new rate “would better reflect how claimants actually invest their compensation in reality”, adding that “if implemented, it will help relieve some of the cost pressures on motor and liability insurance in a way that can only benefit customers.”

Shares in motor insurer Direct Line were up 3.9 per cent at the top of the FTSE 100 index at 8AM on Thursday, while Admiral was down 0.5 per cent. Aviva and RSA, which also have large motor insurance businesses, were down 0.2 per cent and 0.3 per cent respectively. Analysts were awaiting more detail on the new rate.

“The key will be precisely how the discount rate is to be set in the future and the frequency with which it will be adjusted,” Eamonn Flanagan at Shore Capital said in a note.

Reuters