Car insurance giant Direct Line reports 30% slump in profits after taking a £217m hit from government changes to injury claim payouts
Profits at Direct Line have slumped 30 per cent, with the insurance giant blaming government changes to the way personal injury claims are calculated.
Last week, Lord Chancellor Liz Truss revealed changes to the so-called Ogden discount rate calculation, which will result in bigger lump sums for severe accident victims to cover their lifetime losses – increasing costs for insurance firms and motorists.
The insurance sector was sent reeling by the announcement by Ms Truss, and this morning Direct Line reported annual pre-tax profits of £353million for 2016, down sharply on £507.5million earlier.
The car insurance industry will be hit by changes to a calculation for severe injuries, which means larger lump sums will need to be paid out
Stripping out the Ogden rate change, Direct Line said 2016 pre-tax profit would have increased by 12 per cent to £570.3million.
Paul Geddes, boss of Direct Line, says it had a successful year in a market ‘disrupted’ by the change.
He says that in some cases, the change in the Ogden rate could mean a claim doubling, for example from £10million to £20million.
He adds: ‘These are very delicate claims and we absolutely want to look after people with bad accident claims. We’re just trying to get a far judgment.’
From 20 March, the Ogden discount rate will be cut from 2.5 per cent to minus 0.75 per cent, reflecting the changes in the interest rate return, or yield, on UK government bonds, known as gilts.
This is used in severe injury cases and is designed to make sure victims are not over or underpaid, by calculating the returns that they would expect if a lump sum compensation payout is invested.
The compensation should put a victim in a similar financial position to the one they would be in if an accident had not occurred – funding the loss of earnings or care costs they face due to it over their lifetime.
UK government bonds are considered a safe form of investment to deliver these long-term returns and as the yield on them has fallen, larger lump sums will be needed to cover a victim’s lifetime losses.
Direct Line says it does not expect any ‘material’ further hit in 2017 from the Ogden rate.
The change to the Ogden rate is now being consulted on, with rumours that it could be at least partially reversed, and Direct Line said it hoped this would lead to a ‘better and fairer framework for claimants and defendants’.
Shares across the sector were hammered after the decision was announced last week. In early trading, Direct Line shares were down 2.8 per cent, or 9.65p, at 338.75p
Direct Line had already warned investors over the impact of the changes, ahead of today’s full-year results, while fellow insurance giant Aviva said last week that it would take a £385million exceptional charge.
Slump: Direct Line has revealed a profits slump – but says if it wasn’t for government changes to payout claims calculations, profits would have increased 12%
The Association of British Insurers has described the decision to change the way personal injury claims are calculated as ‘crazy’, saying it would have a huge impact for individuals, businesses and public bodies.
It estimates up to 36million individual and business motor insurance policies could see premiums increase by as much as £60 a year as a result of the changes.
It is feared young drivers in particular could struggle to find affordable insurance.
It said new business sales growth was at its highest annual level since its stock market float in 2012 across the motor and home insurance divisions.
The group plans to cut expenses in 2017, but said this would come from an ongoing efficiency drive rather than job losses.
Graham Spooner, investment research analyst at The Share Centre, said: ‘Direct Line has underperformed the FTSE 100 over last year and whilst it is battling to maintain growth in a crowded marketplace, we continue to recommend Direct Line as a "hold" for medium risk investors.’