(Reuters) - British motor insurer Hastings (HSTG.L) warned on Tuesday of a $10 million (£8.03 million) hit to its profits from a change in the discount rate used to calculate compensation for personal injuries, with rivals expected to follow.
Hastings' shares fell nearly 5%, among the biggest falls on the FTSE mid-cap index .FTMC, after the company said it would take an 8.4 million pounds ($10.5 million) pre-tax charge in 2019, in response to Britain's decision on Monday to change the so-called Ogden rate to minus 0.25% from minus 0.75%.
The change follows lobbying from motor insurers, whose profits were hit by a cut in the rate from 2.5% in 2017. However, the insurers had expected a new rate of 0% to 1%.
The lower than expected rate means insurers will have to set aside more money than previously estimated for lump sum payments for people seriously injured in car crashes, potentially denting their profits and pushing up drivers’ premiums.
The new rate will be “a small one-off negative” for UK motor insurers, ratings agency Fitch said on Tuesday.
Hastings said it had held reserves based on a rate in the 0-1% range, but would change its strategy to reflect the new rate.
FTSE 100 insurer Direct Line (DLGD.L) said it had reserved on a rate of 0% and that a minus 1% rate would have had an impact of 76.3 million pounds on pre-tax profit in 2018, according to a sensitivity analysis carried out last year.
A Direct Line spokeswoman said by email that while the new rate was “an improvement on the current rate, it is very disappointing”.
The rate is due to be reviewed in five years and Direct Line said it urged the UK government to “consider revisiting the rate ahead of the five-year period.”
Rival Admiral (ADML.L) held reserves based on a rate of 0%, an Admiral spokesman said, adding the firm would likely update the market on its response at its half-year results next month. Admiral and Direct Line shares have recouped losses made early on Monday.
The discount rate corresponds to the return victims should expect from investments. A lower Ogden rate requires insurers to make larger lump sum payments on personal injury claims, as it assumes lower annual investment returns for those payments.
Excluding the impact from the Ogden rate, Hastings said the underlying calendar year loss ratio for the six months to June 30 - the amount it spends on claims compared with how much it earns on premiums - was expected to be at the top of a range of 75% to 79%.
Reporting by Yadarisa Shabong in Bengaluru and Carolyn Cohn in London; Editing by Arun Koyyur and Mark Potter