Shares in Britain's biggest motor insurers Admiral and Direct Line fell today after the UK government announced new rules that push up lump sum payments for personal injury claims.
The industry's trade body described the change as "crazy".
The UK Ministry of Justice cut the discount rate used to calculate lump sum payouts to -0.75% today from 2.5%, a much bigger cut than the industry had expected.
The industry consensus had been for a cut to not less than 1%.
A reduction in the discount rate is expected to force insurers to pay out more in cash to personal injury claimants now to ensure that returns over their lifetime meet the awarded compensation.
"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.
UK analysts described the move as a "huge blow to insurers".
Admiral estimated the net financial impact on 2016 reported profit at £70-100m, while Direct Line said the new rate would reduce 2016 profit before tax by £215-230m.
The Association of British Insurers, calling the move a "crazy decision" said that motor and liability premiums would rise as a result of the change.
Consultants PwC estimated annual motor premiums would rise by $50-75 on average.
The discount rate is calculated based on real yields on index-linked gilts.
The change will become effective 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 rate.
The change will also affect the UK'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.
