9 October 2012Print This Post

Damages ruling and discount rate change could cost Direct Line up to £350m

April 2013: Direct Line assumed only cases started after would receive extra damages

A refusal by the Court of Appeal to change its ruling on next April’s 10% increase in general damages will cost the Direct Line Group up to £45m, it has emerged.

Further, a change in the discount rate would mean the group having to increase its reserves by as much as £310m.

The Court of Appeal is expected to rule tomorrow on whether to accept an Association of British Insurers’ challenge to its decision in Simmons v Castle. The main question is whether cases which begin before 1 April 2013 – and therefore still have the benefit of recoverability – should still receive the 10% increase, as the court originally said in July.

In its prospectus for floating on the stock exchange, the Direct Line Group said it had previously anticipated that the 10% increase would only apply to cases commenced after 1 April; if the appeal court does not change its ruling, “the group currently estimates that this could result in an adverse pre-tax impact in the region of approximately £30m to £45m to the group’s results in 2012”.

The discount rate is the rate of return to be expected from the investment of a lump sum award of personal injury damages for future loss, and applied to the lump sum to ensure a claimant is not over-compensated.

It is currently 2.5% but claimant groups have argued for some time that it is too high given the low level of interest rates. It is now the subject of a government consultation, which closes in a fortnight.

The prospectus revealed that, since 2010, Direct Line has calculated its estimated reserve based on an assumed discount rate of 1.5% “in recognition of that uncertainty and its best expectations of the future rate to be applied”.

On this basis, a reduction to 1% would result in an increase in net reserves by approximately £85m; 0.5% would mean an increase of approximately £190m; and cutting it to 0% would lead to increase of around £310m.

As reported on our sister site Legal Futures, the prospectus also revealed the level of referral fees received by the group since 2009 as well as an expectation that overall the civil justice reform package should have a broadly neutral impact on the group financially.

 

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