The cost of car insurance could rise rapidly, due to new compensation guidelines announced by the government.
Lord Chancellor Liz Truss announced a cut to the Ogden discount rate used by insurers, in an effort to award larger compensation payments to those seriously injured in car accidents.
What changes are being suggested?
The discount rate is used to determine how much compensation is awarded to those who have suffered life-changing injuries as a result of a car accident. The ‘discount’ is the amount the compensation payment is reduced by to account for the possibility of the victim investing the money.
The discount rate has been set at 2.5% since 2001, but the Lord Chancellor announced last week that this will be cut to -0.75% from 20 March. Chancellor Philip Hammond has since announced the government will consult on the future changes, but it’s not confirmed whether this will affect the plans that have been set out.
While the rate change would be positive for those seriously injured in car accidents as it means larger compensation payments, it’s bad news for insurers as claims will become much more expensive for them.
Why does this affect insurance costs?
The announced cut to the discount rate is much more severe than the insurance industry expected and they have reacted sharply. While the changes won’t be introduced until later this month, some insurers have already reacted to the news by announcing losses and hiking prices.
The discount rate decision will increase the cost of serious claims, and it’s clear from early reactions by insurers that this cost is likely to be passed onto customers in the form of increased premiums.
Consultants PwC estimate that annual motor insurance premiums will rise by £50-£75 on average as a result. But young and older drivers could see a more dramatic increase — PwC estimates 18-22-year-olds’ premiums could increase by as much as £1,000 while over-65s could pay £300 more than they currently do.
The discount rate announcement has been dubbed “crazy” by the Association of British Insurers (ABI), which estimates “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.”
The change comes at a time when drivers are still smarting from recent price increases. Average car insurance premiums recently hit a four-year high, increasing by 11.7% since the end of 2015.
The discount rate cut is not the only thing that could push prices higher. The rate of Insurance Premium Tax (IPT) charged on car insurance policies is set to rise in June — and it’s yet to be seen whether the government will increase the rate further in next week’s Spring Budget announcement.
What you can do to beat the hike
Now the changes have been announced, you might notice that your insurer quotes you a much higher price when it comes to renewal time. While it’s always a good idea to shop around at renewal time, it’s even more important when prices are on the rise.
And even if your policy is not due for renewal, you might be able to get a better deal by shopping around. Bear in mind that you may have to pay a cancellation fee and won’t get your no claims bonus for the year if you switch mid-contract, but you could make savings that outweigh this and you’d be locking your price in for 12 months.
See if you could save by comparing quotes with uSwitch now.