Car insurance costs could fall as Government rethinks compensation rules

Car insurance costs could fall as Government rethinks compensation rules
Car insurance costs could fall as Government rethinks compensation rules

Drivers in the UK could see a reduction in insurance premiums as the government launches a review into a controversial discount applied to injury pay-outs.

The Lord Chancellor and Secretary of State for Justice David Gauke has confirmed that he has started a review of the personal injury discount rate – known as the Ogden rate – and will rule on whether it should be changed by August.

The move has been welcomed by insurers who argued that a change to the rate in 2017 distorted the compensation process and risked pushing up insurance prices for motorists.

Controversial change

The Ogden rate is a discount insurers apply when paying out compensation for life-changing injuries. It operates on the basis that some recipients who receive a lump sum payment will invest that amount and actually increase it.

Previously the discount stood at 2.5 per cent but the 2017 changes set it at -0.75 per cent, meaning insurers have to pay out more to claimants – a cost they warned would be passed onto customers.

Insurers immediately raised concerns and the government quickly said it would revisit the changes, which it is now doing.

Insurers say the review could create a fairer market for drivers and insurers. (Picture: Shutterstock)
Insurers say the review could create a fairer market for drivers and insurers. (Picture: Shutterstock)

James Dalton, director for general insurance policy at the Association of British Insurers, said: “We welcome [the] announcement.

“Insurers remain committed to paying 100 per cent compensation and want to see a process for setting the discount rate that delivers a fair outcome for claimants, motorists and taxpayers.”

Tulsi Naidu, chief executive of Zurich UK, added that the move was a “welcome step”.

“It will help achieve a fairer balance between the award of appropriate compensation and the impact on the cost of insurance and public finances,” she said.

Read more: How the most minor of accidents can invalidate your car insurance

Unsustainable costs

Dan Hutson, head of motor insurance at comparethemarket.com, said the review could give drivers some much-needed relief when it comes to costs.

He said: “The cost of driving for many young people has become unsustainable, in part due to the costly changes to the personal injury discount rate.

“Our estimates indicated that the change made in 2017 would add around £107 to premiums for people under the age of 25. This is on top of the fact that they have been hit with an average addition of £165 to premiums on the back of successive hikes to Insurance Premium Tax. These costs are clearly prohibitive to many people who rely on cars to get to work or study.

“The update from the Lord Chancellor on potential changes to the Ogden rate is welcome news, and given last week’s Spring Statement announcement of an operational review of Insurance Premium Tax, we hope that those with the power to effect change are now looking at the bigger picture for young drivers.”

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