Two leading motor insurers have laid out the positive impact on their profits of a higher discount rate, as the Ministry of Justice conducts its review.
With both forecasting a likely rate of 0%, Admiral said its profits were £66m higher, while Aviva said using this produced a non-operating profit of £190m.
The Lord Chancellor has until August to announce the outcome of the review into the present discount rate of -0.75%, with the change in calculation introduced by the Civil Liability Act 2018 almost certain to mean that it will rise.
In its annual results statement, Admiral said its profits for 2018 were up 18% to £479m on the basis of a 0% discount rate, compared to a far more meagre 2% rise to £413m. Turnover increased 11% to £3.3bn.
It said the “significant majority of relevant open claims at the balance sheet date” would be settled under the new rate.
“The group’s best estimate assumption for the new rate, applied at the 2018 year‐end is 0%. The setting of this assumption reflects a number of factors including current long‐term economic forecasts and analysis released by the Government Actuary Department setting out the approach it is expected to take in recommending the new rate to the Lord Chancellor.
“The estimated total impact, net of reinsurance and before tax, of the change in assumption from the current rate of ‐0.75% to the assumed 0% rate is approximately £120m to £140m on an ultimate basis.” Admiral added that, that when pricing adjusts the level of future premiums to reflect the higher discount rate, “there will be no significant change to the group’s future profitability”.
In its annual results, Aviva said: “We have revised the discount rate used in determining our personal injury claims reserves in the UK to 0%… giving rise to non-operating profit of £190m.”
More broadly, Cristina Nestares, CEO of UK insurance at Admiral, its loss ratio in motor claims was 88.1%, up from 85.3% in 2017, “due to increased frequency in large bodily injury claims and damage claim inflation in 2018, albeit positive loss ratio development for prior years”.
On the whiplash reforms in the Act, which are due to come into force in April 2020 she said: “We believe that the investments we’ve made in our systems and our long‐running track record of efficient processing means that we’ll be well placed to deal with these changes and will pass on the savings to our customers.”
Aviva’s operating profit was up 2% to £3.1bn. In his statement to investors, chairman Sir Adrian Montague the company’s key profit measure, operating earnings per share, was up 7%.
“The security and sustainability of our dividend remains paramount. We are moving to a progressive dividend policy, which will see the dividend maintained or grown over time depending on business performance and growth prospects.”