Insurance Premiums Set To Soar
As of March 20th 2017, a new formula came into effect that calculates compensation payments for motorists. An increase of up to £75 is expected according to industry experts. The decision has attracted some criticism with the Association of British Insurers (ABI) calling the decision “Crazy”. As a result of the new measures, shares in insurance companies have fallen.
In the event of an injury at work or in an accident- the injured party receives a Compensation Payment. Before these new measures, anyone receiving a lump sum in compensation could increase the amount by investing it and getting a return on their investment. For 16 years the discount rate has been set to a rate of 2.5% which meant that insurers could make a smaller initial payout.
The Ministry of Justice has reduced the discount rate to -0.75%, Insurers, as a result, are having to pay out higher sums to those effected by injury- this is pushing up the costs involved for the Insurer.
According to Huw Evans of 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” Experts have estimated that the new measures could costs new drivers up to £1000 a year.
Insurance companies have already stated that their finances would be hit as a result of the changes, Direct line estimated its pre-tax profits would be reduced by £230 million. The Ministry of Justice is now looking to launch a consultation, analysing how the system can be made fairer. They have stated that they will bring forth any legislation “at an early stage”, however they stated they had no choice but to change the discount rate to comply with existing law.