Hastings became the first insurance company to spell out the financial implications of the new discount rate, which an expert has said could lead to recent settlements being reopened.
Lord Chancellor David Gauke is increasing the rate from -0.75% to -0.25%, when insurers had been expecting it to be 0-1%, as the government had initially indicated it was likely to be.
Papers released alongside the announcement indicate that the Government Actuary recommended a rate of 0.25%, but Mr Gauke decided it was “prudent” to reduce it.
In an announcement to the stock exchange yesterday, Hastings Group Holdings said its insurance subsidiary has held “best estimate reserves consistent with an Ogden rate in the range of 0% to 1%, in line with the range indicated by the government previously and the rate at which large bodily injury claims have been settling”.
It said this would now be updated to reflect the new rate. “The company expects this to result in a one-off pre-tax charge to its 2019 financial statements of £8.4m…
“The company confirms that total reserves continue to be held above the best estimate, recognising the inherent uncertainty in claims development patterns, particularly for bodily injury.”
In March, both Admiral and Aviva said they were reserving on the basis of a 0% rate, and laid out the positive impact on their profits.
The fuller impact of the new rate on insurers will come out as they announce results to the stock exchange. At the same time, the government estimated that the higher rate would save insurers up to £320m a year.
Meanwhile, the managing director of Frenkel Topping, the specialist financial adviser for recipients of personal injury and clinical negligence damages, has argued that many claimants would “feel short-changed” by the new rate.
Mark Holt said “thousands of claims” have settled on the basis of the government’s 0-1% indication.
“The defendant would argue for 1%, and the claimant for 0 % and the final settlement would typically be somewhere in the middle.
“In these large claim cases that can amount to millions of pounds, a difference of even a quarter of a % makes a substantial difference to the final settlement.
“The new rate means that we are going to see cases go back to court. For recent large settlements, these will simply not get approved because the sum agreed will not reflect the new rate.”
However, he said that from now on “claimants are set to benefit, especially now all uncertainty over the rate has been removed”.