UK insurance companies saw shares plummet on Monday, after the Ministry of Justice announced a new formula for calculating compensation payments that is likely to increase costs.
The change, announced by Justice Secretary Liz Truss, will see the so-called “discount rate”on compensation payments being cut from 2.5 percent to -0.75 percent. The discount rate reduces compensation payouts in order to make up for the extra money claimants could make by investing that lump sum over many years.
However, the Association of British Insurers (ABI) called the decision “crazy”. Huw Evans, ABI’s director-general, commented:
“Claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK.
“We estimate that up to 36 million individual and business motor insurance policies could be affected in order to over-compensate a few thousand claimants a year.”
Insurance companies have already made statements alluding to how much the changes will cost. Direct Line (LON:DLG) shares are currently trading down 7.60 percent after the company said its pre-tax profit for 2016 will likely be reduced by up to £230 million.
Admiral also said the change in the discount rate could cost it as much as £175 million and that it would postpone the publication of annual results. Shares are currently trading down 2.99 percent at 1,814.00 (1104GMT).
The move could also mean that the Department of Health takes a £1 billion hit. In response, the Ministry of Justice said the change was “likely to have a significant impact on the insurance industry and a knock-on effect on public services with large personal injury liabilities – particularly the NHS”.