Aviva warns it will take £385 million hit over personal injury claim rule

Aviva. Picture: ANTONY KELLY.


Insurance giant Aviva has warned it will take a £385 million hit after the Government announced a change to the way personal injury claims are calculated.

The Norwich-based firm said the exceptional charge to its full-year post-tax profits recognises the 'magnitude of the change in policy and the potential for future revisions to the discount rate to cause unnecessary volatility in Aviva's results'.

Lord Chancellor and Norfolk MP Liz Truss surprised the insurance market on Monday by putting forward changes to the Discount Rate calculation, which is expected to increase payments given to victims of life-changing injuries through medical negligence, car crashes and other incidents.

Ms Truss said that from March 20, the rate would be cut from 2.5% to minus 0.75%, reflecting the changes in gilt yields.

Aviva was one of a number of insurers to see its shares plummet following news of the announcement, alongside Admiral and Direct Line.

MORE: Insurance premiums set to soar after government announces compensation changesOn Tuesday Aviva said: 'After careful consideration given the uncertainty of the ultimate outcome, Aviva expects to take an exceptional charge to its 2016 IFRS profit after tax of approximately £385 million.'

Aviva assured the move would not impact its operating profit, although it will knock two percentage points off its Solvency II capital ratio, a key measure of financial stability for insurers.

Rival Direct Line said on Monday the move was expected to reduce its pre-tax profits by between £215 million and £230 million after reinsurance recoveries.

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Esure also updated the market on Monday and said the discount rate announced was lower than it had allowed for and would see a further net impact of £1 million in 2017, while Admiral warned over a total impact of up to £175 million.

The Association of British Insurers has described the decision to change the way personal injury claims are calculated as 'crazy', warning it would have a huge impact for individuals, businesses and public bodies.

It estimates up to 36 million individual and business motor insurance policies could see premiums hiked as a result of the changes.

It is feared young drivers in particular could struggle to find affordable insurance.