BBC Online has reported that the average car insurance premium could increase by up to £75 a year as a result of a government ruling due to come into effect on 20th March.
A new formula for calculating compensation payments for those who suffer long-term injuries has been announced by the Ministry of Justice – but the Association of British Insurers (ABI) called the decision “crazy”.
The Ministry of Justice said it had no choice under the current law, and said it would consult on possible changes.
How compensation works
Accident victims are paid compensation in a single lump sum, which in serious cases is supposed to support them for the rest of their lives. But someone who receives that lump sum can increase that amount by investing it, and getting a cash return.
So to be fair to insurance companies, the payout is reduced accordingly.
For the past 16 years the discount rate, as it is called, has been set at a typical rate of 2.5% – making the payout that much smaller.
Now the Ministry of Justice has decided to reduce the discount rate from 2.5% to minus 0.75%. That will result in more money for the victim, but a higher cost for the insurer.
The change was ordered because the formula assumes the victim were to invest his or her money in government bonds (‘Gilts’). By the time inflation is taken into account, real returns on such bonds have become negative.
£1,000 potential increase
Reducing the discount rate to minus 0.75% is a “crazy decision”, said Huw Evans, director-general of the Association of British Insurers (ABI).
“Claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK,” he said.
“We estimate that up to 36 million individual and business motor insurance policies could be affected in order to over-compensate a few thousand claimants a year.”
“We anticipate an increase of £50-£75 on an average comprehensive motor insurance policy, with higher increases for younger and older drivers – potentially up to £1,000 for younger drivers, and a rise of up to £300 for older drivers,” said Mohammad Khan, UK general insurance leader at accountancy firm PwC.
A number of insurance companies said their finances would be hit as a result of the changes. Direct Line said it expected its pre-tax profits to be reduced by as much as £230m.
The Ministry of Justice will now launch a consultation on how the system can be made fairer and it will bring forward any necessary legislation “at an early stage”.
In the meantime, it has made it clear it had no choice but to change the discount rate, according to the existing law. “The law is absolutely clear – as Lord Chancellor, I must make sure the right rate is set to compensate claimants,” said Liz Truss, the Lord Chancellor and Justice Secretary.
“I am clear that this is the only legally acceptable rate I can set.”
Let’s all hope this ridiculous situation gets sorted out quickly to avoid these unnecessary premium hikes.