Discount rate change will not reduce future profitability, says Admiral – as Hammond reveals £6bn NHS price tag

Admiral: £150m hit from new discount rate

The change to the discount rate should not have a “significant impact” on future business and profitability because premiums will rise across the market, insurer Admiral said today – although it calculated the immediate cost at £150m.

The news came ahead of Chancellor Philip Hammond revealing in the Budget that he is putting £5.9bn aside to cover the NHS’s extra costs over the next five years as a result of the new rate.

Issuing its annual results, Admiral said this was on the basis of “market pricing adjusting future premiums” to reflect the lower discount rate of -0.75%.

“The group is confident that its strong capital position, along with its prudent approach to claims reserving, will allow it to manage the outcome without significant change to its business or long-term financial outlook,” it told the stock exchange.

It said the majority of the financial impact has been recognised in the form of reduced 2016 profits – from an anticipated £377m to £284m.

“The balance, along with the impact on business written but unearned at the date of change, will be recognised in the form of lower reserve releases and profit commission over the subsequent three to five financial years as the affected claims settle.”

Chief executive David Stevens said: “Our ability to grow our businesses rapidly, both in the UK and overseas, and to absorb the shock of an eccentric government decision on discount rates (sic) while delivering a 37% return on equity and again paying a substantial dividend is a tribute to the health of the business and resilience of our model.”

Direct Line Group, meanwhile, reduced its 2016 profits by £175m as a result of the change – from £570m to £405m (of which £149m was from motor insurance). Its combined operating ratio, which was to be 91.8%, became 97.7% because of the new discount rate.

Direct Line said in its annual results, published yesterday, that it had previously held a provision in claims reserves for the risk of a change in the rate to 1.5%, but added: “The group continues to hold a significant margin above the actuarial best estimate and after this adjustment, the group’s overall reserving strength has been maintained as a result of reflecting the Ogden discount rate change to minus 0.75%.”

The result said the group did not expect the new discount rate to have “any material residual impact on 2017 profit”.

However, Tom Jones, head of policy at claimant firm Thompsons observed that the company still increased the final dividend per share by 5.4%. The firm has been campaigning to highlight insurers’ rising profits at a time when they are also seeking further personal injury reform.

He said: “Direct Line and the rest of the insurance industry are cynically throwing their toys out of the pram and objecting to paying out fair compensation to the victims of serious injury, yet they knew the discount rate bore no relation to interest rates in the real world.

“They have been under-paying people with life-changing injuries since the interest rate crash in 2008, and knowingly so. And yet they are feigning surprise and claim they are unprepared for the Ministry of Justice’s decision. Their shareholders, meanwhile, have done very nicely indeed.

Mr Jones described Mr Geddes as “unrepentant” in saying that Direct Line would be passing on the cost of the new discount rate to drivers.

“This is yet another sickening example of insurers using any excuse in the book to wriggle out of their responsibilities and blame everything but their own greed for not paying out what is due. First it’s ‘fraud’, then insurance premium tax, and now it’s the discount rate.

“Direct Line have been overpaying profits, dividends and CEO salaries and deliberately failing to put money aside since 2008. They are in the prediction business, for God’s sake!

“The suggestion they had no idea they’ve been underpaying and had no idea what was heading their way is an absolute nonsense. The government must stand firm in the face of yet another cynical misinformation campaign by insurers.”

Responding to the Budget, Huw Evans, director general of the Association of British Insurers, said: “This extraordinary bill for taxpayers – bigger than any other in this budget – shows how absurd this avoidable decision was.

“The Office for Budget Responsibility has also confirmed that this will lead to higher inflation for years to come as the effects of such a massive increase in claims costs are felt by customers. This makes it even more urgent that the government deliver a fair deal for consumers and claimants by bringing forward changes to the law this year.”

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