Discount rate bites again: LV wonders what might have been after government decision hits profits

Oliver Gill
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LV is one of the UK's largest motor insurers (Source: Getty)

Annual profits at the UK's largest friendly society were obliterated by the government's controversial decision to reduce the insurance discount rate.

LV today revealed operating profit of £20m after taking a £139m hit from the change of the rate at which personal injury claims are calculated.

The discount rate, mandated by the Ministry of Justice is the reference to which insurers discount compensation on personal injury claims. It was adjusted from 2.5 per cent to a lower than expected level of minus 0.75 per cent in February.

Read more: The government is having another look at its insurance discount rate cut

Group chief executive Richard Rowney called the impact "significant" but was positive adjustments can be made to the policy set by justice secretary Liz Truss.

He said: "We’ve long argued that the methodology used to set the new rate is obsolete and will work with Government to ensure a fair outcome for all and that car insurance premiums aren’t unjustly hit."

The impact of the discount rate change spoilt what was otherwise a positive year with net earned premiums rising from £1.9bn to £2.2bn and operating profit before the discount rate adjustment increasing from £107m to £159m.

The firm's combined ratio, the comparative of losses and expenses to premiums written, fell pre-discount rate adjustment from 96 per cent to 94 per cent. However, this increased to 105.6 per cent once the impact was incorporated.

Read more: Direct Line profits take £217m hit from discount rate cut

“I am pleased with the Group’s trading performance with sales increasing in both general insurance and life and pensions and an increase in operating profit from our trading businesses," said Rowney, adding:

Against the wider challenging backdrop of a sustained low interest rate environment, increased capital requirements resulting from the transition to Solvency II and the continued impact of claims inflation, I am reassured that the business is moving in the right direction.

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