NHS faces new £1bn annual bill after 'reckless' change to injury payouts

The group's solvency coverage above its solvency capital requirement (SCR) included an allowance of £3m for a change in the Ogden discount rate to 0%.

Mohammad Khan, UK general insurance leader at PwC, said: "We anticipate an increase of £50-£75 on an average comprehensive motor insurance policy, with higher increases for younger and older drivers - potentially up to £1,000 for younger drivers (18-22) and a rise of up to £300 for older drivers (over 65)". The director general of ABI, Huw Evans, said that the new formula was a insane decision.

The government's decision to slash the insurance discount rate caught most of the sector's largest firms by surprise this morning.

The ABI claimed it could also mean a £1billon bill for compensation costs landed on the NHS.

The Government cut the rate, which has not been changed since 2001, from 2.5 per cent to -0.75 per cent today, reflecting the current United Kingdom climate of low interest rates.

Huw Evans of the ABI said: "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 36m individual and business motor insurance policies could be affected in order to over-compensate a few thousand claimants a year".

Specialists note that SMEs will also be hit by increased rates.

The shares for the UK's two biggest motor insurers fell sharply after the ministry of justice announcement, with Admiral down almost 9% and Direct Line losing 7.5% at one stage.

LONDON-Admiral Group PLC (ADM.LN) said Monday that the change in the discount rate used by United Kingdom courts to calculate personal injury damages awards, known as the Ogden rate, would knock 2016 reported profit by 70 million pounds ($87 million) to GBP100 million. While insurers like Direct Line (DLG) and Admiral (ADM) scrambled to warn investors this will leave a huge hole in full-year results, one has emerged from the FTSE 350 rubble.

"Today's discount rate is lower than some companies had expected, with Esure for example budgeting for a fall to zero per cent", said Nicholas Hyett, an analyst at Hargreaves Lansdown.

Motor insurers may pass on the increased costs in the form of higher premiums. The rates calculate future losses in personal injury and fatal accident cases.

The blue-chip's combined operating ratio is also likely to rise by 6% from the 92-95% guidance set before the rate change.

She added that four "key pledges" will be made. The announcement of a move to -0.75% means many insurers will need to further increase their reserves, potentially impacting expected results for year-end 2017 for those who have already announced their results and year-end 2016 for those that have still to report. Ultimately, these increased costs will be funded by policyholders and already overstretched public finances.

Even though it has no choice but to apply the new formula, the government will receive any constructive ideas to make the system work and to make sure that the right and fairer rate is set for both the claimants and the insurers.

This "discount rate" has been set at 2.5% since 2001, but the Government has revised it because the rate people are able to earn from low-risk investments has fallen sharply.

  • Salvatore Jensen