Insurance companies have warned of a potential rise in premiums following the announcement of changes to the regulations governing compensation pay-outs to the victims of life changing accidents.
Currently, accident victims receive a lump sum, which, depending on the severity of the injuries received, may be designed to support them for the rest of their lives. The pay-out is adjusted according to how much money could potentially be earned by investing the sum. Known as the discount rate, this reduction has been set at 2.5% since 2001. Now, the Ministry of Justice has announced its decision to lower the discount rate to -0.75%. The move represents a significantly better deal for recipients of compensation, but also means that insurance companies paying out for claims will feel the pinch, and this will be reflected in the cost of an insurance policy.
It has been predicted that drivers of new and used cars could face increases of £50 to £75 on average in the price of a fully comprehensive policy. Young drivers between the ages of 18 and 22 are likely to be hardest hit, potentially paying up to £1,000 more than before. Older drivers aged over 65 may have to pay around £300 extra. Critics of the scheme have warned of the negative effect of pricing young drivers who already pay over the odds for insurance. All policy types will be effected including motor trade insurance, commercial vehicles and fleet policies.
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In a meeting with senior figures from the insurance industry, Chancellor Philip Hammond offered reassurance that the government would consult on how to make the scheme fair to insurers and drivers, as well as claimants. Insurance firms predict a loss in profits, with Aviva expecting to lose £385m as a direct result of the changes. The Association of British Insurers (ABI) has announced that it intends to push for the scheme to be blocked.
The government has also announced changes to the laws surrounding personal injury claims. These may offset the effects of the alteration to the discount rate, saving motorists around £40 on insurance. Most drivers should be able to keep their policy at similar price level by comparing different insurers and shopping around for the best price.
The new discount rate is set to come into effect on March 20th.