Insurance premiums will rise after drastic cut to discount rate

Insurers anticipate that average car insurance premiums could rise by up to £75 a year as a result of a government ruling which was revealed this week.

The Ministry of Justice (MOJ) has announced a new formula for calculating the compensation payouts awarded to claimants who suffer long-term effects of their injuries. Insurers were expecting a reduction in the discount – known as the Ogden rate – which is applied if an insurance company makes a lump sum payment to a claimant. However, the reduction from 2.5 per cent to minus 0.75 per cent is considerably bigger than anticipated.  Some insurers said they had provided for a discount rate move to 1.5 or 1 per cent, with the most conservative rate move anticipated as 0.5 per cent.

Huw Edwards, director-general of the Association of British Insurers called the decision to make such a large change “crazy”.  He said: “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”.

The discount rate, which had not been amended since 2001, is based on gilt yields, or interest rates from government bonds. However, with the effect of inflation as well, the MOJ said that the real return is negative.

Experts have advised that the hardest hit will be those with larger insurance premiums, so a driver under the age of 22 may have to pay up to an additional £1,000 per year. The beneficiaries of this change will be accident victims as they will receive higher payouts.

The MOJ said that it had no choice but to reduce the discount rate according to the existing law and they will now launch a consultation on how the system can be made fairer.

Record High Motor Insurance Premiums

SOURCE: ABI

Insurance premiums have reached their highest recorded level, according to the ABI. The insurance body says the increase has been caused by the combined effect of a rise in repair costs, increases in Insurance Premium Tax and a continued rise in whiplash-style claims.

Premiums rose by more than five times the rate of inflation in 2016, with the average premium now costing £462. Further rises could come if the Ministry of Justice goes ahead with plans to reduce the discount rate for insurance payouts.

One reason for the increase in premiums is a rise in the cost of repairs because of cars’ increasingly sophisticated electronics. Another is that buying spare parts is getting more expensive because of the weakness of the pound. The average repair bill has risen by 32 per cent in the past three years, the ABI said.

Rob Cummings, the ABI’s assistant director and head of motor and liability, said: “These continue to be tough times for honest motorists. They are bearing the brunt of a cocktail of rising costs associated with increasing whiplash-style claims, rising repair bills and a higher rate of Insurance Premium Tax.

"The sudden decision to review the discount rate has the potential to turn a drama into a crisis, with a significant cut throwing fuel on the fire in terms of premiums.”