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| Car insurance: Chancellor vows action on compensation rates | Car insurance: Chancellor vows action on compensation rates |
| (about 2 hours later) | |
| Chancellor Philip Hammond has said the government will "urgently" consult on future changes to compensation rates for victims of car accidents. | |
| Insurers have warned that car insurance premiums could "soar" due to a new government formula for calculating personal injury payments. | |
| Mr Hammond met insurance bosses on Tuesday to discuss the issue. | |
| In a joint statement with the industry, he said the system must be "fair" to claimants as well as other drivers. | |
| "The government will progress urgently with a consultation on the framework for setting future rates, and bring forward any necessary legislation at an early stage," Mr Hammond said. | "The government will progress urgently with a consultation on the framework for setting future rates, and bring forward any necessary legislation at an early stage," Mr Hammond said. |
| However, he did not commit to making changes to the formula before it comes into force next month. | However, he did not commit to making changes to the formula before it comes into force next month. |
| 'Crazy' change | 'Crazy' change |
| Mr Hammond met chief executives and other senior executives from 15 major insurance firms, including Aviva, Direct Line and Admiral. | Mr Hammond met chief executives and other senior executives from 15 major insurance firms, including Aviva, Direct Line and Admiral. |
| Ahead of the meeting, the Association of British Insurers (ABI) had said it would urge the chancellor to block the new formula before it kicks in on 20 March. | |
| The ABI said the "crazy" change could increase car insurance premiums for young drivers by up to £1,000 a year. | The ABI said the "crazy" change could increase car insurance premiums for young drivers by up to £1,000 a year. |
| How compensation works | 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. | 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 receives that lump sum can actually increase that amount by investing it, and getting a cash return. | But someone who receives that lump sum 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. | 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 at a typical rate of 2.5% - making the payout that much smaller. | For the past 16 years the discount rate, as it is called, has been set at a typical rate of 2.5% - making the payout that much smaller. |
| Now the Ministry of Justice has decided to reduce the discount rate from 2.5% to minus 0.75%. | Now the Ministry of Justice has decided to reduce the discount rate from 2.5% to minus 0.75%. |
| That will result in more money for the victim, but a higher cost for the insurer. | That will result in 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. | 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. |
| The reaction of the insurance industry has been overwhelmingly negative, with some insurers saying that profits would be hit by hundreds of millions of pounds. | The reaction of the insurance industry has been overwhelmingly negative, with some insurers saying that profits would be hit by hundreds of millions of pounds. |
| Aviva became the latest insurance firm to warn of a hit on Tuesday, saying the change would cost it £385m in profit. | Aviva became the latest insurance firm to warn of a hit on Tuesday, saying the change would cost it £385m in profit. |
| However, lawyers who campaigned in favour of the change said it was "long overdue". | However, lawyers who campaigned in favour of the change said it was "long overdue". |
| Accident victims who suffer long-term injuries are set to benefit as they will receive higher payouts under the new formula. | |
| The Ministry of Justice said on Monday it would launch a consultation before Easter on how the system can be made fairer. | |
| It said it would bring forward any necessary legislation "at an early stage". |