Car insurer Hastings has warned of an £8.4 million hit to profits from reforms to personal injury compensation.
Shares in the group dropped 5% after the alert, which comes after Monday’s decision to alter the so-called Ogden discount rate used to calculate compensation paid out for personal injury claims.
Lord Chancellor David Gauke announced changes to the scale used to determine the size of payouts for those involved in accidents – amending the rate to minus 0.25% from minus 0.75%.
The insurance sector had been lobbying for a bigger review of the rate, which was slashed from 2.5% to minus 0.75% in 2016, leading to an outcry in the industry, and a consultation was launched in response.
Hastings said it had been basing estimates on a change to between zero and 1%, “in line with the range indicated by the Government previously and the rate at which large bodily injury claims have been settling”.
The worse-than-expected outcome means Hastings “expects this to result in a one-off pre-tax charge to its 2019 financial statements of £8.4 million”, it added.
While the Ogden rate change is set to lead to higher payouts for personal injury claimants, it is feared the move will also force insurance premiums up across the board.
Insurance analyst Paul De’Ath, at Shore Capital, said price hikes would ultimately benefit Hastings.
He said: “The medium-term impact of a worse-than-expected rate is more likely to be higher prices, which should be a benefit to Hastings.
“If this can be a catalyst for wider price increases across the market, that would be very positive for Hastings and help to return it to growth.”
The Ogden rate was set at 2.5% in 2001 and relates to the return victims should expect from investments.
A lower Ogden rate means insurers have to make larger lump sum payments on personal injury claims, because it assumes lower returns from annual investments for those payments.