UK motor insurers prepare to break-even after Government's lump sum seesaw

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The Government proposed to change the so-called  Ogden rate, used to calculated severe personal injury claims, in September after months of pressure from the industry.  Credit: Rui Vieira/PA Wire

UK motor insurers, who were staring down the barrel of £3.2bn in combined losses only a few months ago because of controversial changes to the way personal injury payouts are calculated, are likely to escape with much a much smaller hit than originally feared, according to figures from consultancy EY. 

Earlier this year, the Government proposed changes to the so-called Ogden rate, which is used to calculate how much insurers pay out to people who have been severely injured in accidents. The Government's change of heart was the result of a furious backlash from insurers who claimed that the original rate was far too generous.

The sector said that the rate cut in February would hammer their profits. Direct Line and Admiral were among the firms that were expected to suffer. The newly proposed rate should mean that insurers will not suffer big losses this year and could make profits in 2018, according to EY. 

The consultancy has predicted that the sector's net combined ratio - where a figure of below 100 reflects a profit and one above it will mean a loss - is likely be 100.8pc for the year. The sector's combined ratio next year is forecast to be "solidly in the black" at 98.5pc, it said, with the revision to proposals saving the industry as much as £2.5bn. 

Huw Evans, the director general of the Association of British Insurers and a former Downing Street special adviser, told the Justice Committee last month that young and elderly drivers – the groups most at risk of getting into serious accidents – would suffer much higher insurance costs if the rate reforms did not go through. 

The Government's initial move to cut the rate in February has already added £75 to the cost of an average to car insurance policies, PwC said earlier this year, leading to outcry among insurers that the figure was too low.  

EY believes average premiums could fall by between 2pc and 4pc if the proposed Ogden rate is adopted, saving up to £21 each year for motorists. However one large motor insurer said it could not make a decision on prices until the proposals had gone through. 

Shares in insurance companies rose in September following the new proposals, which need to be approved by parliament. This is the first time the rate has been changed since 2001 and has sent shockwaves through the industry, with Mr Evans telling The Telegraph earlier this year that a rate of -0.75pc could hit insurers "far greater than any of the floods combined". 

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