* Discount rate cut to -0.75 pct from 2.5 pct
* Means rise in lump sum payments for personal injury claims
* PwC says motor insurance to rise up to 75 stg a year
* Personal injury lawyers say change long overdue
* Admiral, Direct Line shares slide
(Rewrites top, updates story with personal injury lawyer
comment, updates shares)
By Carolyn Cohn
LONDON, Feb 27 Britons will have to pay much
more for motor insurance after the government announced new
rules on Monday that will push up lump sum payments for personal
The industry's trade body described the change as "crazy" as
it would lead insurers to further increase motor insurance
premiums, which jumped 9 percent last year. The personal injury
lawyers' trade group, however, said it was "long overdue".
Shares in Britain's biggest motor insurers Admiral
and Direct Line tumbled after the Ministry of Justice
said the discount rate used to calculate lump sum payouts would
be cut to minus 0.75 percent, from 2.5 percent - a much bigger
reduction than the industry had expected.
The ministry expects the lower rate to force insurers to pay
out more in cash to personal injury claimants to ensure that
returns over their lifetime meet the awarded compensation.
The change will come into effect next month.
"The current legal framework makes clear that claimants must
be treated as risk-averse investors, reflecting the fact that
they may be financially dependent on this lump sum, often for
long periods or the duration of their life," the Ministry of
Justice said in a statement.
The discount rate is calculated based on real yields on
index-linked UK government bonds, but had not been changed since
2001 and so failed to account for a sharp drop in real yields,
which are currently negative.
The Association of British Insurers, calling the move a
"crazy decision", said in a statement that motor and liability
premiums would rise as a result. Consultants PwC estimated
annual motor premiums would rise by 50-75 pounds on average.
That means higher costs for motorists, after premiums rose
9.3 percent last year due to tax increases, rising repair costs
and whiplash claims.
However, the Association of Personal Injury Lawyers said in
a statement that "people already coping with the most severe
injuries have been deprived of the help and care they need for
Barrie Cornes, analyst at Panmure Gordon, described the move
as a "huge blow to insurers".
Admiral estimated the net financial impact on 2016 reported
profit at 70 million-100 million pounds ($87 mln-$124 mln).
Its shares were down 3.2 percent at 1,811 pence at 1035 GMT.
Direct Line said the new rate would reduce 2016 profit
before tax by 215 million-230 million pounds. Its shares fell
7.8 percent to 336 pence, making it the worst performer in
Britain's blue chip FTSE 100 index.
Shares in mid-cap motor insurer Esure, however,
were up 3 percent at 214 pence, recovering initial losses after
the company estimated the net impact of the rule change for 2017
would be 1 million pounds.
The change will also affect Britain's health service. The
government has committed to making sure there is enough money to
cover changes to hospitals' clinical negligence costs, the
justice ministry said.
Mid-cap insurer Hastings said the change would lead
to a one-off pre-tax charge of 20 million pounds in its 2016
Its shares were unchanged at 232 pence.
The change will become effective on March 20 although the
Ministry of Justice said that in coming months it would also
consult on whether this was the appropriate way to calculate the
($1 = 0.8050 pounds)
(Reporting by Carolyn Cohn; Additional reporting by Esha Vaish
in Bengaluru; Editing by Rachel Armstrong and Susan Fenton)