Author Mark Richards
In March the Government changed the way compensation payouts to accident victims were calculated, which would have led to significantly higher car insurance premiums for everyone. Now that ruling has been reversed – so is it all good news?
Back in March, we reported on some serious news for motorists: their insurance premiums were going up. For young drivers premiums were going to rise by as much as £500 a year and there was real concern that some drivers would no longer be able to afford to insure their cars. Would they stop driving? Or would they simply drive without insurance? As we describe below, it looked very much like the latter.
Why were premiums increased in March?
It is slightly technical and it is Monday morning, so I will try and keep the explanation as simple as possible…
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 has always been reduced, by what is known as the ‘discount rate.’ Until March this rate was set at 2.5% – as it had been for 16 years, based on the assumption that someone receiving their compensation would invest it in Government Bonds.
However, in March the discount rate was reduced to minus 0.75%, due to the very low rate of interest then being paid on Government bonds. The decision was made by Liz Truss, the Justice Secretary, who 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.”
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. 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.”
Increase in uninsured drivers
Following the move insurance premiums started to increase. Whether this directly led to a rise in the number of uninsured drivers is difficult to say. You would think it had to be a contributory factor, and by August the BBC was reporting on the first increase in claims by victims of uninsured drivers for 10 years. The Motor Insurers’ Bureau said that in the year to July claims had risen by 10% to 12,000 (so around 240 a week) after declining consistently since 2004. In total, the MIB expects to pay out £258m this year – money which is provided by the insurance companies and adds around £15 to the cost of a typical policy.
June 8th to the rescue…
So all doom and gloom: insurance premiums were going up, and there would be a steady increase in compensation for people who had been hit by uninsured drivers, which we would all end up paying for.
However, you may have noticed that we had a General Election back in June, which was followed by the inevitable Government reshuffle: Liz Truss is now Chief Secretary to the Treasury and the new Justice Secretary is David Lidington, the MP for Aylesbury. And lo and behold, the Government ‘has had a re-think’ on the changes made in March.
Following consultations with the Ministry of Justice and the Scottish Government, new draft legislation has been published which – if agreed by Parliament – might go some way to reducing, or stabilising, our premiums, admittedly at the expense of the compensation payouts made to accident victims.
How would this happen? It is down to our old friend, the discount rate. The Ministry of Justice said that the rate is now likely to be in the range of 0% to 1% – so still down on the previously used 2.5% but a significant increase on the minus 0.75% favoured by Liz Truss. So much for the ‘only legally acceptable rate, I can set…’
This move would see the discount return for insurers – theoretically cutting premiums and lump-sum payouts. Not surprisingly the insurance industry welcomed the proposals, with Huw Evans saying,
“This is a welcome reform proposal to deliver a personal injury discount rate that is fairer for claimants, customers and taxpayers alike.”
But not everyone likes the change…
Not surprisingly, lawyers who act on behalf of injury victims were less than impressed. Brett Dixon, president of the Association of Personal Injury Lawyers, said,
“The last thing people with devastating injuries think about is their insurance premiums. They think about how they are going to manage. [An increased discount rate] is of no benefit to people who are severely injured and forced to take risks with the compensation they so desperately needed.”
What will this mean for my insurance premiums?
Most of us though, rather than worrying about discount rates and the woes of personal injury lawyers, will be asking one key question: ‘does this mean my insurance premiums will come down?’ The answer, according to accountants PwC – is that they may not come down, but this ruling is likely to prevent future significant rises. “Premiums had already risen by about £75 a year on average,” said Mohammad Khan, UK general insurance leader at PwC.
“For young drivers, they had risen by up to £250 as insurers passed on roughly half of the expected costs caused by the previous ruling. If this [new] announcement had not been made then insurers would have passed on the remaining costs and annual premiums would have risen again in November and December, by an average of £100 for UK motorists and by between £300 and £500 for young drivers.”
So if you have been paying slightly higher premiums since March you may need to get used to it – but it least it looks like you will no longer need to budget for a significant increase next year.