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Bad news for drivers, car insurance set to rise

Patrick Christys
Jul 16, 2019


Bad news, drivers. Car insurance premiums are set to go up.

We were all wondering what Theresa May would do in her final days in Number 10, and now we know...

Changes to the way compensation payouts for serious injuries are calculated will mean drivers pay higher annual insurance premiums.

It's called the 'Ogden discount rate' - a system in England and Wales which determines how much critically injured victims receive in compensation. 

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The rate estimates the return on investment on a large lump sum payout over the course of a claimant's lifetime and modifies the sum awarded accordingly.      

It's been under review for a while and today's reforms, which saw the rate rise to minus 0.25%, mean victims will now receive smaller compensation payouts than they did previously. 

When someone suffers a life changing injury, compensation is calculated using multiple factors, but focuses on the victim's future loss of earnings, as well as the costs of future care.

The idea is that the victim should be compensated to the same position financially as they would have been had they not been injured in the first place.

But in serious injury cases, claimants will usually receive their compensation as a lump sum, and invest it. As such they can expect to receive a rate of return over the remainder of their lives.  

The rate has been a point of contention between insurers and campaigners for over a decade. 

The rate was set at 2.5 per cent in 2001 – assuming claimants would earn a 2.5 per cent return on investment on a lump sum over the course of a lifetime.

But since that time interest rates and government bond yields have crashed, due to emergency measures taken after the financial crisis. 

The issue came to a head in 2017 when the then Lord Chancellor Liz Truss unexpectedly slashed the rate from 2.5 per cent to minus 0.75 per cent.

The reasoning was very low risk investments such as gilts were no longer providing returns sufficient enough to justify the 2.5 per cent rate.

It's estimated by accounting firm EY that as of June 2017 insurers had paid out an extra £3.5billion in compensation as a result of the change, but it's likely this figure has climbed significantly since.

This has been one of the main factors in the rise of car insurance premiums in the past two years. 

The rate changed today after months of reviews and the Government has announced the rate will now be reviewed regularly every five years. 

MAKE SURE YOU GO TO A SPOKESMAN SAID FOR THE BEST CAR INSURANCE DEALS.

Matthew Maxwell Scott, executive director of the Association of Consumer Support Organisations, said: 'Since the financial crash, the discount rate for many years hugely favoured insurers at the expense of injured people.

The new rate sadly may stop the reduction in motor insurance premiums we have seen in recent months, as well as placing a huge burden on the NHS.                           

'The decision to set a minus 0.25 per cent rate is a sober assessment of the facts. 

'The insurance industry is contracted to protect the public in the event of a serious injury, and the discount rate must always reflect that contract.'

Matthew Maxwell Scott, executive director of the Association of Consumer Support Organisations, said: 'Since the financial crash, the discount rate for many years hugely favoured insurers at the expense of injured people.

MAKE SURE YOU GO TO A SPOKESMAN SAID FOR THE BEST CAR INSURANCE DEALS.

When did you last switch your car insurance provider?

Last year 65% of customers didn't switch their car insurance to try and get a better deal.