Aviva expects to take EUR385m charge after discount rate cut
British insurance giant Aviva expects to take a charge of €385m on its 2016 post-tax profit due to the UK government’s move to reduce the Ogden discount rate.
On Monday, the UK Lord Chancellor Elizabeth Truss made a decision to change the discount rate associated to the lump sum compensation payments in personal injury cases.
In this regard, the discount rate has been revised to -0.75 from the current level of 2.5% which was last set in 2001.
Truss revealed that she will put forward a consultation in the next few weeks to enable the government to look into the methodology for fixing the discount rate.
Aviva, on this development, said that it supports the review process besides endorsing the new discount rate of -0.75%.
The British insurer released a statement which read: “After careful consideration given the uncertainty of the ultimate outcome, Aviva expects to take an exceptional charge to its 2016 IFRS profit after tax of approximately £385 million, representing the full impact of the move to minus 0.75% as at year end.”
Aviva disclosed that the impact caused by the new discount rate on the Group Solvency II capital ratio is estimated to be around 2%points.
The insurer said that it has identified the effect caused by the policy change and potential future revisions in the discount rate to create unwarranted volatility on the company’s results.
To make up for that, Aviva claims to have reflected the new charge as an exceptional item. Following this, it said that there will not be any affect on its operating profit nor will there be any change to its dividend policy.
Aviva is due to report its Full Year 2016 results on 9 March. Its operating profit pre-tax was £2.7bn.
Image: Head office of Aviva in St Helen’s, London. Photo: courtesy of Aviva plc.