A decision to reverse discount rate changes could lead to cheaper car insurance costs if it goes ahead.
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 current discount rate was introduced in March 2017, but the government has proposed a second change in an apparent u-turn after facing criticism.
A cut to the discount rate had long been expected, as it had been in place since 2001. However, the cut earlier this year from 2.5% to -0.75% came as a shock to the industry. The rate change significantly increased compensation costs for insurers, and they reacted by increasing insurance premiums.
Earlier this month, the Lord Chancellor and Justice Secretary, David Lidington, announced the discount rate will be revisited. The changes would need to be approved by Parliament but could be in the region of 0% to 1%.
What impact does this have on premiums?
When the discount rate was cut in March, consultants PwC estimated the change would add £50-£75 to the average driver’s premium. The average cost of insurance has in fact risen by £52 since the change was introduced, according to the latest British Insurance Premium Index from the AA.
Although the proposed change won’t revert the discount rate all the way to its previous level, a rise to 0-1% could have a positive impact on insurance premiums by lowering the cost of payouts to insurers.
However, drivers shouldn’t expect a dramatic drop in premiums as insurers still attribute higher repair costs and an increase in Insurance premium tax (IPT) to rising prices in recent years.