Insurance premiums ‘set to soar’ after compensation changes
According to a recent article published by the BBC, average car insurance premiums could increase by up to £75 a year as a result of a government ruling, industry experts have said.
A new formula for calculating compensation payments for those who suffer long-term injuries has been announced by the Ministry of Justice, however, 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. Shares in insurance companies fell, with some saying that profits would be hit by millions of pounds.
The change is due to take effect from 20 March.
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. Therefore, to fair to insurance companies, the pay-out 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 pay-out that much smaller.
The Ministry of Justice has however recently decided to reduce the discount rate from 2.5% to minus 0.75%. This will in turn 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. By the time inflation is considered, real returns on such bonds have become negative.
Reducing the discount rate to minus 0.75% was 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.”
Experts said higher insurance premiums could cost drivers under the age of 22 up to £1,000 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.
Older drivers include anyone over the age of 65.
However, accident victims are set to benefit as they will receive higher pay-outs. Lawyers who had campaigned in favour of the changes welcomed the news.
“People already coping with the most severe injuries have been deprived of the help and care they need for years,” said the Association of Personal Injury Lawyers.
Several insurance companies said their finances would be hit because of the changes.
Direct Line said it expected its pre-tax profits to be reduced by as much as £230m.
Where negligence claims are made against the NHS, the bill could rise by £1bn, the Treasury said.
But the NHS Litigation Authority will be compensated for any extra cost, the government promised.
The Ministry of Justice will now launch a consultation on how the system can be made fairer.
It said it would 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.”
James Lavers, Business Development Manager at Sennocke International Insurance Services, said:
“Car insurance prices throughout 2016 increased by 14%, on average a cost of £95. Motorists are already faced in 2017 with further increases due the proposed compensation changes and Insurance Premium Tax increases due in June. Motor insurers are going to want to remain competitive, attract new customers and retain existing customers.”
“Whilst fair pricing for insurance is always important, motorists should be wary not to sacrifice service and insurance coverage for the cheapest policy. Reviewing your existing motor policies will be essential. Sennocke International Insurance Services Ltd can assist with your motor enquiries including; (High Value Vehicles, Classic Cars & Collections, Company Fleet Policies).”