The cost of car insurance could jump by an average of £75/year following the Government's decision to award larger compensation payments to people who have an accident and suffer life-changing injuries, insurance experts have warned.
Young drivers are expected to be worst hit by the move to push up the price of personal injury claims, with industry experts predicting that 18- to 22-year-olds could face an eye-watering annual hike of up to £1,000 in their motor insurance premium.
Market insiders have also estimated that motorists over the age of 65 may in some cases end up forking out an extra £300/year on top of what they're already paying for their car insurance.
If you're worried that the potential price hikes seem astonishingly steep, it's worth bearing in mind that these figures are merely initial estimates by professional services firm PwC and it may be that rate rises are not as severe as first feared.
Insurance company bosses discussed the matter with the Government last night (Tuesday) and the Treasury has since confirmed to MoneySavingExpert.com that the changes will go ahead on Monday 20 March. They will be consulted on in the coming weeks.
A spokesperson for the Association of British Insurers (ABI) has this morning (1 March) told us that "premium hikes remain realistic", but that the industry would look at "developing options and will be working with the Treasury to get some resolutions very quickly".
Nevertheless, with the cost of car insurance already rising 12% in the past year, it's worth checking now if you can lock in cheaply even if your policy's not due for renewal. See full help in our Cheap Car Insurance guide.
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Why are prices set to rise?
Insurance firms are warning prices are likely to rise as a result of the Government's decision to adjust the rate used to calculate one-off payments to those who suffer life-changing injuries.
When someone who has suffered a life-changing injury accepts a lump sum compensation payment, the sum they get is adjusted according to the interest they could expect to earn by investing it what's known in industry jargon as the 'discount rate'.
The discount rate has stood at 2.5% since 2001 but much to the insurance industry's dismay, Lord Chancellor Liz Truss has made the decision to cut the rate to -0.75%.
Estimates by market analysts suggest the move will add an extra £7 billion to insurers' costs, and the value of personal injury claims could double as a result.
The new discount rate will come into effect on Monday 20 March, following amendments to current legislation. But insurers could crank up premiums any time from now.
Check NOW if you can lock in a cheap deal
Many are overpaying already, especially those who just auto-renewed. So check now if you can cut your costs and lock in to a cheap deal to beat the hikes. Here's what to do, depending on how close you are to renewal:
- If you're at renewal, it's easy NEVER automatically accept your renewal quote, just use our car insurance system to bag the cheapest deal.
- If your renewal's within 60 days, then some insurers let you get a quote before your renewal's due and keep that price, meaning you'll beat the hikes if prices rise.
- Even if you're midway through your policy, it's worth checking if you can save for a £50ish admin fee (factor that in) you can usually cancel your existing policy and get the rest of the year refunded, provided you've not claimed.
To find the cheapest policy, use the system set out in full in our Cheap Car Insurance guide in brief:
- Combine comparison sites to speedily find your cheapest deal before hikes hit. There's no one cheapest insurer, as prices are different for everyone. Our current order's Confused.com*, Gocompare* then MoneySupermarket* (see how we rank them). If you can, use all three.
- Then check the biggies comparisons miss. Direct Line* and Aviva* won't appear on comparison sites, and can be competitive.
- Then check the hidden hot deals comparison sites miss, eg, £60 M&S voucher. See our full list of current hot deals.
Insurance industry slams 'crazy' compensation changes
The ABI swiftly criticised the move to cut the discount rate and warned the resulting rise in claims costs will trigger a spike in motor and liability insurance premiums.
Huw Evans, ABI director general, said: "Cutting the discount rate to -0.75% from 2.5% is a crazy decision by Liz Truss... We estimate that up to 36 million individual and business motor insurance policies could be affected in order to overcompensate a few thousand claimants a year.
"To make such a significant change to the rate using a broken formula is reckless in the extreme, and shows an utter disregard for the impact this will have on consumers, businesses and the wider operation of the insurance market."
Meanwhile, PwC has crunched the numbers and is predicting substantial price hikes for motorists.
Mohammad Khan, UK general insurance leader at PwC, said: "Unfortunately, this announcement will have a significant adverse impact on motor insurance prices that drivers pay and also commercial insurance rates paid by small businesses.
"As a direct result of this change, we anticipate an increase of £50-£75 on an average comprehensive motor insurance policy, with higher increases for younger and older drivers."
Initial calculations by PwC suggest the decision to cut the discount rate will drive up the following premiums:
- Average comprehensive premiums up from £450/year to about £525/year.
- Younger driver premiums (18- to 22-year-olds) up from an average of £1,300/year. PwC hasn't said what it think this average will rise to, but has predicted premiums could hit an upper limit of £2,300/year.
- Older driver premiums (65+) up from an average of about £400/year. Again, PwC hasn't said what it think this average will rise to, but has predicted premiums could hit an upper limit of around £700/year.
It's worth noting though that PwC hasn't released the full calculations behind these estimates, so at this stage they're very much a rough prediction.
What does the Government say?
The Government says the discount rate was lowered because the law states compensation claimants must be treated as "risk averse investors", financially dependent on their lump sum for long periods or the duration of their life.
Liz Truss, who is also Justice Secretary, said: "The law is absolutely clear as Lord Chancellor, I must make sure the right rate is set to compensate claimants. I am clear that this is the only legally acceptable rate I can set."
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