By Carolyn Cohn
LONDON (Reuters) - The Association of British Insurers on Friday called for an overhaul in the calculation of lump sum payments in personal injury claims, after a change in the way they are worked out pushed up the size of the payments, denting insurers' profits.
Motor insurance premiums have also risen after Britain's Ministry of Justice in February unexpectedly cut a discount rate used to calculate the payments, to -0.75 percent from 2.5 percent.
A lower discount rate drives up the size of the upfront payments as it assumes claimants will receive lower investment returns from investing their lump sums.
AIG (N:AIG), Allianz (DE:ALVG) and Zurich Insurance (S:ZURN) are among U.S. and European insurers operating in the British motor insurance market to report hits to their profits from the rate change.
"The current methodology used to calculate the discount rate is fundamentally flawed as it does not reflect the reality of how claimants invest their damages," James Dalton, director of general insurance policy at the ABI, said in a statement outlining the trade body's response to a government consultation.
The discount rate was cut because it is linked to index-linked British government bonds, known as gilts, which currently have negative yields, partly as a result of low UK interest rates.
The ABI said it would prefer a dual rate, in which the discount rate was lower for the first years of a claim, before stepping up to a higher rate. It said the discount rate should not be linked to one investment asset, but to a "low-risk, mixed portfolio" of assets.
The Association of Personal Injury Lawyers, however, said in its submission to the consultation that the current method of calculating the rate meant the injured claimants did not need to invest their lump sums in high-risk assets.
"This is exactly how it should be when that money is supposed to look after them for the rest of their lives," APIL president Neil Sugarman said in a statement.