Car insurance set to soar after changes to compensation rules

The formula used to work out compensation claims has changed. Picture: Getty Images
The formula used to work out compensation claims has changed. Picture: Getty Images
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Car insurance is expected to increase alongside personal injury payouts after changes to the formula used to calculate compensation sums.

The move will affect financial awards given to victims of medical negligence, car crashes and other incidents.

It will have an impact on major public bodies with large compensation bills such as the NHS, while there were warnings millions of drivers could see insurance costs rise.

The measure, announced by Lord Chancellor Liz Truss yesterday to the London Stock Exchange, relates to a calculation called the Discount Rate, which has been unchanged since 2001.

When victims of life-changing injuries accept lump sum compensation payments, the actual amount they receive is adjusted according to the interest they can expect to earn by investing it. In finalising the compensation amount, courts apply the Discount Rate, with the percentage linked in law to returns on the lowest risk investments, typically Index Linked Gilts.

Claimants must be treated as risk-averse investors who are financially dependent on 
the lump sum, often for long periods or the duration of their life.

Awards using the rate should put them in the same financial position had they not been injured, taking into account loss of future earnings and care costs.

From 20 March, the Discount Rate will fall from 2.5 per cent to minus 0.75 per cent.

As well as seeing compensation payments rise, the decision will have a knock-on effect on public services with large personal injury liabilities such as the NHS, which saw clinical negligence costs in England rise from £1.2 billion in 2014/15 to £1.5 bn the following year. The move is also likely to have a significant impact on the insurance industry.

Huw Evans, director general of the Association of British Insurers, called the decision “crazy” and “reckless in the extreme”.

He added: “Cutting the discount rate to minus 0.75 per cent from 2.5 per cent is a crazy decision by Liz Truss.

“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.

“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.”

Ms Truss is also Justice Secretary, but made the decision in her capacity as independent Lord Chancellor.