Insurers dealt new blow after less favourable change to compensation rate
UK car and home insurers are crying foul after the Lord Chancellor raised the discount rate on personal injury lump-sum compensation but left it short of the level the industry had hoped for.
The Lord Chancellor raised the personal injury discount rate – or Ogden rate as it is known – to minus 0.25% from the minus 0.75% set in 2017 but this is well below the level industry insiders were demanding.
LV Insurance’s general insurance claims director Martin Milliner said the change ‘doesn’t go far enough’ in replacing the ‘absurd and fiscally irresponsible’ decision to cut the rate to minus 0.75% two years ago.
‘At this level we believe that claimants will remain over-compensated, thus undermining the common law principle of 100% compensation,’ added Milliner.
According to an industry survey, around half of insurers were hoping that the rate would be increased to somewhere between 0.1% and 1%.
The rate is used to assess how much accident victims should be given as a lump sum to be used over their lifetime if they are seriously injured, for example in a car accident.
The decision to keep a negative interest rate, rather than set a positive rate, is good for accident victims and bad for insurance companies because it means the initial sum paid out has to be bigger.
Following the announcement of the new rate, Hastings said it would need to put aside an extra £8.4m in reserves, lowering its pre-tax profit for this year.
Analysts at Morgan Stanley and UBS see Admiral as the most exposed given that it assumed a 0% Ogden rate for reserving last year, and have cut their 2019 earnings forecasts for this stock by as much as 15%.
Partly as a result of the negative Ogden rate, which has increased the cost of personal injury claims, insurers are facing the highest level of motor claims inflation for many years. This could lead to lower levels of dividend growth than previously enjoyed, or even dividend cuts.
Other factors pushing up claims inflation are credit hire, fraud and soaring repair costs.
Due to the use of more sophisticated technology in modern cars, higher prices for parts from abroad due to the weak pound and rising labour rates, repair costs have helped push motor claims inflation well above 5% for most of this year.
A study this week by Confused.com shows that the industry has been fighting back by pushing through an average 5% increase in motor premiums in the second quarter, but analysts see insurers’ margins shrinking further this year.