Categories: Guest Articles

Car Insurance Prices to Increase Due to Compensation Rules Change

A new change to the formula used to calculate compensation payments for people with long term injuries could see a rise in insurance premiums of around £75 and even as much as £1,000 in some cases.  The ruling was announced by the government and has already been labelled ‘crazy’ by the Association of British Insurers (ABI).

How Compensation Payments Work

The system at the moment sees accident victims paid compensation in a lump sum and in serious cases this payment is designed to support them for the rest of their lives.  A payment can then be invested to get a cash return.  To ensure the amount paid out by insurance companies is fair, the payout was reduced on this basis accordingly.

For the last 16 years the discount rate, as it is known, has been set at 2.5% so the payment made to anyone who was injured was reduced by this amount.  However, now the Ministry of Justice has decided to amend this rate from 2.5% to -0.75%.  This verdict means that the victim will receive a larger payout and the insurer will have to incur higher costs.  

The change came about because the formula used to dictate the amount assumed that the victim would invest their money in government bonds.  However, inflation means that the real returns on such bonds have actually become a negative.

How It Affects Drivers

While this might sound good for anyone receiving this kind of compensation, it is a negative for everyone else as this will mean insurers have to increase their premiums to cover the extra expenses.

Huw Evans, director-general of the ABI described the move as a ‘crazy decision’ and said that claims costs would soar due to the new ruling.  They believe that around 36 million individual and business policies may have to be increased to compensate just a few thousand claimants a year who fall under the new ruling.

Higher premium payers could see the biggest increases with drivers under 22 possibly seeing as much as £1,000 a year extra on the cost of their policy.  The average driver will likely see an increase of around £50-£75.  Drivers over 65 could see their premiums increase by some £300 in some cases.  Costs could also increase for commercial vehicle policyholders and small businesses.

The change will also wipe out the small decrease that policyholders were set to see due to the personal injury legal reforms.  These were expected to reduce premiums by around £40 a year but this will be lost as a result of the new compensate rate.

High Costs All Around

Insurer Direct Line have already said they expect their pre-tax profits to be reduced by as a much as £230 million due to the ruling.  Where negligence claims are made against the NHS, the bill could be in the region of £1 billion, according to the Treasury.

The Ministry of Justice will now launch a consultation to investigate how the system can be made more fair and look into any legislation ‘at an early stage’ which could lead to an amendment of the existing law.  

Author Bio: Stuart Cooke works for BMG Insurance based in Northern Ireland. They provide Car and Haulage Insurance and are sure to be impacted with these new rules on compensation payments.