The Government's move to change the way personal injury compensation payouts are calculated has begun to have an effect on the profits of insurance companies, with both Direct Line and Admiral citing the changes as the reason for a slump in year-on-year profits in recent days.
Direct Line reported a 30% drop in profits to £353m for the year up to 31 December 2016, with the recent reduction in the personal injury discount rate apparently costing them £217m in profits. The discount rate - also known as the Ogden rate - is used to calculate the compensation paid to people who suffer life changing injuries, and without the change Direct Line would have actually recorded an 11% rise in profits which would have triggered the payout of a special dividend.
Following the news from Direct Line, Admiral followed suit and announced a £105m drop in profits to the year up to 31 December - which led their chief executive to call the discount rate change an "eccentric Government decision."
The change in the discount rate caused a drop of 25% in Admiral's pre-tax profits to £284.3m. Without the 'Ogden rate' change Admiral would have seen a 3% rise in profits.
The decision from the Ministry of Justice to reduce the discount rate from 2.5% to -0.75% came as something of a shock to the insurance industry when it was announced last month - with analysts expecting a more modest reduction of between 1 - 1.5%.
The new rules come into effect on 20 March 2016 and mean that insurance companies will be expected to pay more to claimants, which will likely increase premiums.
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Personal injury claims payout guide (external link)