Car Insurance Premiums Set To Soar

The Ministry of Justice has announced a new way of calculating compensation payments which could see average car insurance premiums soar by up to £75 a year.

Lord Chancellor Liz Truss announced plans to cut the discount rate to -0.75% from 2.5%.

She said: "The government will review the framework under which I have set the rate today to ensure that it remains fit for purpose in the future. I will bring forward a consultation before Easter that will consider options for reform including: whether the rate should in future be set by an independent body; whether more frequent reviews would improve predictability and certainty for all parties; and whether the methodology – which in effect assumes that claimants would invest only in index-linked gilts – is appropriate for the future. Following the consultation, which will consider whether there is a better or fairer framework for claimants and defendants, the government will bring forward any necessary legislation at an early stage.

"I recognise the impacts this decision will have on the insurance industry. My Rt. Hon. Friend the Chancellor will meet with insurance industry representatives to discuss the situation."

However, the Association of British Insurers (ABI) said the decision was "crazy" and estimated 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.

Huw Evans, Director of the ABI, said: "To make such a significant change to the rate using a broken formula is reckless in the extreme, and shows an utter disregard for the impact this will have on consumers, businesses and the wider operation of the insurance market.

"We have repeatedly warned the Government that this could lead to very significant price rises, with younger drivers in particular likely to find it much harder to get affordable insurance. It is also a massive own goal that lands the NHS with a likely £1billion hike in compensation bills when it needs it the least.

"We need a fairer deal for consumers and claimants. We cannot wait until Easter - the Ministry of Justice must commit to alternatives immediately so changes to the law can be included in the Prison and Courts Bill."

Carolyn Fairbairn, CBI Director-General, said the unexpected, significant cut to the discount rate is a setback for the UK's insurance industry.

She said: "We support a fair framework for claimants and defendants, but the way in which the discount rate is calculated is flawed, as it is based solely on short term market movements.

"It's important that the planned consultation happens straight away, to make sure long term economic factors are included in the calculation of the discount rate.

"From the increasing strain of business rates to questions over the UK's future relationship with Europe, the cumulative burden of challenges is weighing on UK companies. Now more than ever, it is critically important that firms have a stable policy framework in which to grow, invest and drive prosperity for all parts of the UK."

(CD)