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Yesterday the Ministry of Justice announced that it's changing the way personal injury payouts are calculated, but while the ruling is beneficial for those making such claims, it could have a devastating impact on car insurance premiums, with figures estimating that drivers could be facing price rises of up to £100 each as a result.
That's according to market research experts Consumer Intelligence, who expect the decision to cut the discount rate to -0.75% from 2.5% to increase costs for insurers by up to £3 billion – and they'll be passing those costs on, which means consumers will ultimately be paying the price.
The discount rate is used in major personal injury claims where victims who suffer "catastrophic injuries" are awarded lump sums. The money is meant to be used to support them for the rest of their life, but if they invest the funds they could actually get a higher return, so the discount is applied to reduce the amount that can initially be paid out in order to make it fairer to insurance companies.
The rate has been set at 2.5% since 2001, but now that returns on Government bonds (where the formula assumes the victim would invest) have turned negative once inflation is taken into account, the Ministry of Justice said it has "no choice" but to also cut the discount rate to negative levels. This means insurers will have to pay out more, and so, too, will consumers.
While the lawyers who campaigned for the rule change are happy with the result, the insurance industry isn't quite so pleased with it. Huw Evans, director general of the Association of British Insurers (ABI), said it was a "crazy decision" that will cause claims costs to soar.
"[This makes] it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK; we estimate 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.
"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. We need a fairer deal for consumers and claimants."
As Huw points out, some drivers could be particularly vulnerable to rising prices as a result of the rule change, and PwC has highlighted the potential impact it could have: "As a direct result of this change, we anticipate an increase of £50-£75 on an average comprehensive motor insurance policy, with higher increases for younger and older drivers – potentially up to £1,000 for younger drivers (18-22 year olds) and a rise of up to £300 for older drivers (over 65 years old)," said Mohammad Khan, UK general insurance leader at PwC.
"This announcement, on top of the recent increases in Insurance Premium Tax, will make redundant any savings to premiums as a result of the Government's personal injury legal reforms which were anticipated to generate a saving of approximately £40 per motor insurance policy."
However, the change won't just lead to higher prices – it could also lead to a jump in the number of people shopping around, as they attempt to mitigate the impact of the ruling. Another rule change could also boost comparisons, as from April, insurers will be required to show last year's premium on all renewal quotes, in a move designed to make shopping around easier.
"This is going to cause a massive jump in shopping around as this is the first year that insurers are going to have to be upfront about premium changes," said Ian Hughes, chief executive of Consumer Intelligence. "Drivers will see their prices rising and will not be bothered about whether it is the Ministry of Justice or discount rates that are behind the premium increases.
"Average car insurance premiums will continue to accelerate and that is before yet another increase in Insurance Premium Tax in June. Everyone should be shopping around to at the very least limit price rises."
Use our car insurance quote tool to find a better deal and limit the impact of rule changes in the industry
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