After the insurance discount rate furore, the government is looking again at how personal injury claims are calculated

Oliver Gill
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Ministers Attend The Weekly Cabinet Meeting At Downing Street
Lord Chancellor Liz Truss upset many in the insurance sector last month (Source: Getty)

Insurers' hopes have been raised the government will follow through on a promise to swiftly amend the way personal injury claims are calculated.

Last month, justice secretary Liz Truss caught the insurance sector by surprise when she cut the discount rate from 2.5 per cent to -0.75 per cent.

Although a lowering of the rate was expected, the level of the cut wiped hundreds of millions off the earnings of the UK's insurers and sent shares tumbling.

The backlash from the sector was sufficiently substantial for chancellor Philip Hammond to step in and provide assurances to amend the way the rate is calculated and find a middle ground.

Read more: Insurance discount rate: Chancellor is "personally committed" to solution

Today, the Tories followed through on the pledge by launching a consultation on the matter, which is set to close on 11 May.

Huw Evans, the director general of the Association of British Insurers (ABI), welcomed the fact "the government has moved swiftly to consider reform" after Truss' "absurd" move. He added:

This consultation document is an important step forward in helping get a fair, modern way to set the discount rate which works for claimants, consumers, businesses and taxpayers.

Insurers hope once the consultation has closed proposals can be put into law by making amendments to the Prisons & Courts Bill that currently working its way through parliament.

He added: "As the only major economy in the world with a negative rate, the UK will face significantly increased insurance and taxpayer costs until the system is reformed and a new rate can be set.”

Read more: Government cuts discount rate: Insurers to lose billions

As part of the consultation, the government has asked for views on who should set the discount rate, how often it should be set and what core principles should guide the setting of the rate.

Motor insurers

The increased cost of personal injury claims can hit motor insurers in particular. The increased costs may be passed onto customers, who have also seen insurance premium tax rates spike in the last 18 months.

Steve Treloar, the managing director of general insurance at LV said: "Urgent change needs to be delivered so that a new discount rate can be implemented, saving money for millions of drivers and businesses and helping younger and older drivers stay on the roads."

Read more: Admiral boss blasts Truss after revealing £150m discount rate hit

Meanwhile, City experts predicted a boost for insurance firms. Kamran Hossain, an analyst at RBC capital markets, changed his target prices and made some upgrades to leading insurers such as Direct Line, Admiral and Hastings Direct.

Hossain said there was potential for the discount rate to rise to 0 per cent, a move that would boost firms' all-important Solvency II ratios, which in turn would lead to cash otherwise tied up in the business being free to be used elsewhere.

Direct Line's share price rose by 1.25 per cent to 340.2p at 3.45pm with Admiral's shares up 0.81 per cent at 1,993p per share.

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