Author Mark Richards

A new ruling on compensation means that insurance premiums for motorists are set to increase dramatically

A new ruling from Liz Truss, the Lord Chancellor, means that insurance premiums – especially for older and younger drivers – are set to increase substantially, in order to pay compensation to those injured in accidents.

Motorists’ organisations and the insurance companies were swift to condemn the move: Huw Evans, Director-General of the Association of British Insurers (ABI) said,

“we estimate that up to 36m individual and business motor insurance policies could be affected in order to over-compensate a few thousand claimants a year.”

Defending the move, Liz Truss, the Lord Chancellor and Justice Secretary said,

“The law is absolutely clear – as Lord Chancellor I must make sure the right rate is set to compensate claimants. This is the only legally acceptable rate I can set.”

How does accident compensation work?

Clearly if someone is injured in a car accident which is not their fault they are entitled to compensation: this compensation has always been paid as a lump sum, which in very serious cases will be intended to support someone for the rest of their lives, if necessary paying for their home to be adapted and for specialist medical care and support.

However, if someone receives a large lump sum they could clearly increase it by investing it – so to be fair to the insurance companies, the payout is reduced accordingly, by what is known as the ‘discount rate.’

For the past 16 years this discount rate has been set at 2.5%, making the lump sum payout correspondingly smaller: after all, the intention is that someone is supported and given whatever assistance they need – not that they buy a villa in the south of France…

However, the new ruling means that the discount rate has been changed from 2.5% to minus 0.75%. The reason is that the formula used to calculate the payout assumes that the person receiving the compensation will invest it in Government bonds. The prevailing very low-interest rates mean that the return on those bonds has been significantly reduced – and by the time inflation is taken into account, the real return on the bonds has been negative.

The result of this change will be a higher payout for the victims of road traffic accidents – which in turn means higher costs for the insurance companies, which they will pass on to you and me in the form of higher premiums.

The Reaction to the New Ruling

‘Outrage’ is probably the word that best describes it. Huw Evans branded the decision as “crazy” and said,

“Claim 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.”

A number of insurance companies said their finances would be hit by the ruling. The one ray of light – despite the Lord Chancellor saying that she had ‘no choice’ is that the Ministry of Justice will now launch a consultation on how the system could be made fairer.

It was also reported on Wednesday morning – just 24 hours after the announcement from the Lord Chancellor – that Chancellor of the Exchequer Philp Hammond had held a “hastily convened” meeting with insurance industry executives. It looks as though there will be a battle within Government over this but, for now, motorists should probably plan for the worst.

Is anyone else affected? Or is it just the motorist?

Is anyone else effected?

Clearly, accidents do not just happen on the roads and over recent years there have been increasing payouts by the NHS for medical negligence. However, the Government has promised that the NHS Litigation Authority will be protected against any extra costs, with estimates that the bill for the NHS could have increased by £1bn thanks to the new ruling. GPs will also be protected, with the Department of Health promising to ‘work closely’ with them.

Had the Government not promised this protection the NHS could have had a significant bite taken out of its budget: clinical negligence costs in England rose from £1.2bn in 2014/15 to £1.5bn the following year.

Small businesses will also be affected as their public liability premiums will be set to increase. This could be another reason for Philip Hammond to become involved, as small businesses are already facing the prospect of imminent rises in business rates.

What does this mean for you and me?

In a word, higher premiums. Shares in insurance companies fell on the news, with Direct Line estimating that the new ruling will reduce their pre-tax profits by up to £230m. But you get the feeling that the insurance companies will stick together: if they all increase their premiums, what choice does the motorist have? Yes, the market is competitive, and drivers may reduce the impact by shopping around – but older and younger drivers are going to be particularly hard hit by the new ruling.

Initial estimates are that average premiums could increase by £75 a year – but some experts are predicting that the change could cost drivers under 20 up to £1,000 a year in extra premiums. Many younger drivers may well be priced out of owning a car.

Mohammad Khan, UK general insurance leader at accountancy firm PwC, confirmed these figures and added, “We [also] anticipate a rise of up to £300 a year for older drivers.” (Older drivers are those drivers over the age of 65.) As Mr Khan pointed out, this increase more than wipes out the personal injury legal reforms (in simple terms, cutting down on whiplash claims and fraud) which were expected to save the average motorist £40 a year on their premiums.

When will the change take place?

Unfortunately, the answer is ‘very quickly.’ The change is due to take effect from March 20th and will presumably impact immediately on new policies and those policies being renewed.

Is it good news for anyone?

Clearly, it is good news for accident victims, who will receive higher payouts – and it will also be good news for injury lawyers. You may not be surprised to learn that they have been campaigning hard for this change: “People already coping with the most severe injuries have been deprived of the help and care they need for years,” said a spokesman for the Association of Personal Injury Lawyers.

Yes – sadly, this ruling means that you can expect your evenings to be increasingly interrupted by a sincere-looking man in a suit asking, ‘Have you been injured in an accident that wasn’t your fault?’