The change in the discount rate has led to Direct Line increasing its reserves by £17m, the company announced yesterday.
Meanwhile, the Association of British Insurers (ABI) – which has been outspoken in its criticism of the new rate – has warned that it will put pressure on motor premiums.
Direct Line had calculated its reserves in anticipation of the rate rising to 0% but has had to change this in light of David Gauke’s decision last month that it should increase from -0.75% to -0.25%.
In its half-year results, published yesterday, the insurer said it revalued all of its lump sum bodily injury reserves using the new rate, resulting in a £16.9m increase in reserves.
“The group’s prior-year reserve releases were £171.6m (H1 2018: £206.5m) with good experience in large bodily injury claims being a key contributor. Looking forward, the group expects to continue setting its initial management best estimate conservatively.
“Assuming current claims trends continue, prior-year reserve releases are expected to continue to reduce further in future years, although they are expected to remain a significant contribution to profits.”
In the first half, motor still delivered Direct Line a profit of £154m and a combined operating ratio of 95.1%, meaning it paid out £95.10 for every £100 of premium received.
Last month, Hastings Insurance said the discount rate would cost it £8.4m.
In a presentation to investors, Neil Manser, the company’s interim chief financial officer, said the market was not pricing for claims inflation.
“There are two market trends that insurers will need to make judgements on. First, the upcoming whiplash reforms and, second, the new Ogden rate which was worse than the 0 to 1% range most in the market were expecting…
“While we can’t be immune from market pricing pressures, we remain committed to investing in the business with the aim of delivering benefits on cost and underwriting that mean we can, to some extent, carve our own path.”
Earlier this week, the ABI’s latest motor insurance premium tracker said the average price paid in the second quarter of the year rose by £1 on the previous quarter to £467, although this was £10 less than in the same quarter of 2018.
It said “spiralling” vehicle repair costs, driven by ever more complex cars and the impact of the falling pound on the cost of imported parts, continued to add significant cost pressures to insurers, while the new discount rate “will further add to insurers’ costs, and put more pressure on premiums, especially for higher risks, such as young drivers”.
Mark Shepherd, the ABI’s assistant director, head of general insurance policy, said: “The recent decision on the discount rate is bad news for motorists that will simply add to insurers’ costs rather than save customers money, at a time when vehicle repair bills and theft claims are rising.
“Motor insurance remains a highly competitive market, but some motorists may in the future have to search harder to get the right policy for their needs at the best price. This makes it more important than ever that the whiplash reforms in the Civil Liability Act are implemented on time and in full.”
In response, Matthew Maxwell Scott, executive director of the Association of Consumer Support Organisations, criticised the ABI’s “breathtaking” inconsistency.
He noted that in April, when it published the last premium tracker showing a £15 quarter-on-quarter fall in premiums – the biggest since 2013 – the ABI said some insurers were passing on expected cost savings in anticipation of the Civil Liability Act reforms.
Mr Maxwell Scott said: “How can the recently enacted personal injury reforms deliver falling premiums in April, and then by not being implemented be accountable for rising premiums in August? The inconsistency of the ABI when it comes to personal injury must be called out.”