Insurers’ profits sink after compensation shock
MAJOR insurers are this week expected to flag up price hikes for customers in the wake of a shock Government move on compensation payments for people involved in life-changing accidents. Admiral and Direct Line both report full-year numbers this week, with the industry reeling from the Government’s decision last month to slash the Ogden rate used to calculate insurers’ compensation payments, which are designed to support victims for the rest of their lives. The Ogden rate is the rate of investment return those receiving compensation payments are expected to earn. It is set by the Justice Secretary Liz Truss, and last month she slashed it from 2.5 per cent to minus 0.75 per cent.
The cut means insurers will have to make bigger upfront compensation payments.
PwC has said car insurance premiums will rise more than 10 per cent, or £50 to £75 on average, to meet the cost.
Evidence of rising insurance costs will heap further pressure on Chancellor Philip Hammond to intervene in his Budget on Wednesday.
The same day, Admiral will say 2016 profits were £286 million, down from £369 million in 2015, said analysts at investment bank Berenberg. Admiral has said the Ogden change could cost it £175 million over five years.
Meanwhile, Direct Line will say on Tuesday that 2016 profits fell to £288million from £508 million in 2015. It believes the compensation change will knock 2016 profits by up to £230 million.
Investment bank UBS said that car insurance is rising at 5 per cent a year. On top, the pound’s fall is driving up the cost of replacement parts and with the Ogden changes, that could imply 20 per cent price rises. ‘It is unlikely companies will be able to entirely pass this on without losing market share,’ the bank said in a note.