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Aviva reveals discount rate will give it a nine-figure hit

Aviva reveals discount rate will give it a nine-figure hit

Aviva reveals discount rate will give it a nine-figure hit
Industry heavyweight Aviva is expecting to take a £385 million hit following the government’s decision to reduce the discount rate used to calculate lump sum payments for personal injury claims.
 
Aviva said the anticipated exceptional charge to its 2016 post-tax profits represents the full impact of the discount rate cut. The estimated impact on the group Solvency II capital ratio is about two percentage points.
 
“Reflecting this charge as an exceptional item 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,” the company said.
 
“Accordingly, it will not affect Aviva’s operating profit and there will be no change to our dividend policy,” added the insurer, which will report its 2016 results on March 9.
 
On Monday, the government slashed the discount rate from 2.5% to -0.75%, sparking outrage among insurance companies as the new rate was beyond industry expectations. The Association of British Insurers (ABI) called it a “crazy” and “reckless” decision that would result in higher claims costs and motor and liability premiums for millions of drivers and businesses across the UK.
 
Rating agency Fitch has warned that motor insurers will face a short-term hit to earnings from the increase in lump-sum reserves, and higher reinsurance costs following the discount rate cut announcement.
 
In addition to Aviva, other insurers have revealed the potential impact of the new discount rate on their profits. Direct Line said the rate cut will reduce its pre-tax profits by between £215 million and £230 million after reinsurance recoveries. Admiral warned of a total impact of up to £175 million, while Esure projected a net impact of £1 million in 2017.
 
 
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