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| Insurance premiums set to soar after compensation changes | Insurance premiums set to soar after compensation changes |
| (about 4 hours later) | |
| Average car insurance premiums could increase by up to £75 a year as a result of a government ruling, industry experts have said. | Average car insurance premiums could increase by up to £75 a year as a result of a government ruling, industry experts have said. |
| A new formula for calculating compensation payments for those who suffer long-term injuries has been announced by the Ministry of Justice. | A new formula for calculating compensation payments for those who suffer long-term injuries has been announced by the Ministry of Justice. |
| But the Association of British Insurers (ABI) called the decision "crazy". | But the Association of British Insurers (ABI) called the decision "crazy". |
| The Ministry of Justice said it had no choice under the current law, and said it would consult on possible changes. | The Ministry of Justice said it had no choice under the current law, and said it would consult on possible changes. |
| Shares in insurance companies fell, with some saying that profits would be hit by millions of pounds. | Shares in insurance companies fell, with some saying that profits would be hit by millions of pounds. |
| The change is due to take effect from 20 March. | |
| How compensation works | |
| Accident victims are paid compensation in a single lump sum, which in serious cases is supposed to support them for the rest of their lives. | |
| But someone who is awarded, say £100,000, can actually increase that amount by investing it, and getting a cash return. | |
| So to be fair to insurance companies, the payout is reduced accordingly. | |
| For the past 16 years the discount rate, as it is called, has been set 2.5%. So a compensation payment of £100,000 would have been cut to £97,500. | |
| Now the Ministry of Justice has decided to reduce the discount rate from 2.5% to minus 0.75%. | |
| That would put the compensation payment at £100,750 - meaning more money for the victim, but a higher cost for the insurer. | |
| The change was ordered because the formula assumes the victim were to invest his or her money in government bonds. | |
| By the time inflation is taken into account, real returns on such bonds have become negative. | By the time inflation is taken into account, real returns on such bonds have become negative. |
| '£1,000 increase' | '£1,000 increase' |
| Reducing the discount rate to minus 0.75% was a "crazy decision", said Huw Evans, director-general of the Association of British Insurers (ABI). | Reducing the discount rate to minus 0.75% was a "crazy decision", said Huw Evans, director-general of the Association of British Insurers (ABI). |
| "Claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK," he said. | "Claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK," he said. |
| "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 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." |
| Experts said higher insurance premiums could cost drivers under the age of 22 up to £1,000 a year. | Experts said higher insurance premiums could cost drivers under the age of 22 up to £1,000 a year. |
| "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, and a rise of up to £300 for older drivers," said Mohammad Khan, UK general insurance leader at accountancy firm PwC. | "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, and a rise of up to £300 for older drivers," said Mohammad Khan, UK general insurance leader at accountancy firm PwC. |
| Older drivers includes anyone over the age of 65. | |
| However, accident victims are set to benefit as they will receive higher pay-outs. | However, accident victims are set to benefit as they will receive higher pay-outs. |
| Lawyers who had campaigned in favour of the changes welcomed the news. | Lawyers who had campaigned in favour of the changes welcomed the news. |
| "People already coping with the most severe injuries have been deprived of the help and care they need for years," said the Association of Personal Injury Lawyers. | "People already coping with the most severe injuries have been deprived of the help and care they need for years," said the Association of Personal Injury Lawyers. |
| Consultation | Consultation |
| A number of insurance companies said their finances would be hit as a result of the changes. | A number of insurance companies said their finances would be hit as a result of the changes. |
| Direct Line said it expected its pre-tax profits to be reduced by as much as £230m. | Direct Line said it expected its pre-tax profits to be reduced by as much as £230m. |
| Where negligence claims are made against the NHS, the bill could rise by £1bn, the Treasury said. | Where negligence claims are made against the NHS, the bill could rise by £1bn, the Treasury said. |
| But the NHS Litigation Authority will be compensated for any extra cost, the government promised. | But the NHS Litigation Authority will be compensated for any extra cost, the government promised. |
| The Ministry of Justice will now launch a consultation on how the system can be made fairer. | The Ministry of Justice will now launch a consultation on how the system can be made fairer. |
| It said it would bring forward any necessary legislation "at an early stage". | It said it would bring forward any necessary legislation "at an early stage". |
| In the meantime, it has made it clear it had no choice but to change the discount rate, according to the existing law. | In the meantime, it has made it clear it had no choice but to change the discount rate, according to the existing law. |
| "The law is absolutely clear - as Lord Chancellor, I must make sure the right rate is set to compensate claimants," said Liz Truss, the Lord Chancellor and Justice Secretary. | "The law is absolutely clear - as Lord Chancellor, I must make sure the right rate is set to compensate claimants," said Liz Truss, the Lord Chancellor and Justice Secretary. |
| "I am clear that this is the only legally acceptable rate I can set." | "I am clear that this is the only legally acceptable rate I can set." |
| Have you received compensation after an accident? Do you think it was enough? Share your experience by emailing haveyoursay@bbc.co.uk | Have you received compensation after an accident? Do you think it was enough? Share your experience by emailing haveyoursay@bbc.co.uk |
| You can also contact us in the following ways: | You can also contact us in the following ways: |
| Or use the form below | Or use the form below |