Insurers have accused the UK government of being “misleading and wholly disingenuous” in its latest decision on how compensation is set for people who are seriously injured in accidents.
The government on Monday reset the calculation, known as the Ogden discount rate, in a move that insurers said would leave them paying out much more to accident victims than they had expected.
The decision will cost the insurance industry millions of pounds, and could lead to higher motor insurance premiums.
In a letter to David Gauke, justice secretary, Huw Evans, the head of the Association of British Insurers, said that the government’s impact assessment was “misleading and wholly disingenuous”.
“I am very surprised indeed you chose to sign such a flawed document,” he added.
The insurers are angry about the latest change to the Ogden rate, which in effect is an assumption about how much interest the accident victims would earn if they were to invest their compensation. The higher the Ogden rate, and hence the assumed return, the lower the lump sum paid by the insurance companies has to be.
The rate has been set at minus 0.75 per cent since 2017 but was reviewed this year. Insurers had expected the rate to rise to somewhere between zero and 1 per cent, but on Monday Mr Gauke said it would rise only to minus 0.25 per cent.
The change drew widespread condemnation from the insurance industry and sent share prices across the sector falling.
In his letter, Mr Evans said that the government’s impact assessment failed to outline the consequences of the change: “No mention is made to the Ministry of Justice’s guidance to the stock market in September 2017 that it expected a new rate to be set at between zero to 1 per cent.”
He added: “Many large insurance companies used this for their reserving and pricing decisions from this point on.”
The Ministry of Justice responded: “We appreciate that insurers feel the change does not go far enough but the rate was set following extensive consultation and we have been consistently clear that 0-1 per cent was not an estimate and should not be used as such.”
Insurance companies have already had to adjust their reserves to take account of the new rate. On Tuesday, Hastings said that it had been reserving on the basis that the rate would be between zero and 1 per cent. To take account of the government’s latest change, the company said it would have to take a one-off £8.4m hit to its profits.
Personal injury lawyers and consumer organisations welcomed the government’s decision, saying that it would ensure that accident victims were properly compensated.
Matthew Maxwell Scott, executive director of the Association of Consumer Support Organisations said: “It is of course vital that badly injured people get what the courts decide is due, and their funds are sufficient to enable them and their loved ones to get the best available care.”