Shares in motor insurers have slumped following worse than expected changes to the way personal injury claims are calculated.
Shares readers would have been aware of this looming decision as we covered it in our 16 February issue. We pointed to number crunching by investment bank UBS which suggested a reduction in the so-called ‘Ogden rate’ from 2.5% to 1% had already been priced in to the value of insurance company shares.
The actual reduction, announced today, is to -0.75%.
WHAT IS THE OGDEN RATE?
Ogden is used to calculate compensation payments to victims of car accidents based on the return any money paid out can earn when it is invested.
The lower the rate, the higher the lump sum required. Direct Line (DLG) had previously warned a one percentage point decrease in the rate would wipe £190m off its profit.
Today it says the new discount rate will hit by pre-tax profit by £215m to £230m after reinsurance recoveries.
Admiral (ADM) says the estimated total net financial impact of all claims settling at the new rate is £140m to £175m.
WHAT HAS IT DONE TO SHARE PRICES?
The likes of Admiral, Direct Line, Esure (ESUR), Hastings (HTG) and over-50s specialist Saga (SAGA) were down as much as 8% when the stock market opened.
While some have already pared those losses entirely the market appears to be distinguishing between winners and losers.
Admiral remains off 4.1% to £17.93 and Direct Line is down 6.3% to 341.8p, while Esure, Saga and, happily, Hastings, which we saw as best placed to absorb any changes, are now more or less unchanged.
UBS comments in the wake of today's news: 'We expect the change to lead to premium price increases, in addition to those required to pass on ongoing non-bodily injury claims inflation.
'We would expect these price rises, along with incoming FCA regulation that increases renewal pricing transparency, to lead to increased churn.
'We expect this to lead to higher acquisition expense ratios across the industry, although this is beneficial for those trying to grow share.'
