LONDON: Britons will have to pay much more for motor insurance after the government announced new rules on Monday that will push up lump sum payments for personal injury claims.
The industry’s trade body described the change as “crazy” as it would lead insurers to further increase motor insurance premiums, which jumped 9 per cent last year. The personal injury lawyers’ trade group, however, said it was “long overdue”.
Shares in Britain’s biggest motor insurers Admiral and Direct Line tumbled after the Ministry of Justice said the discount rate used to calculate lump sum payouts would be cut to minus 0.75 per cent, from 2.5 per cent — a much bigger reduction than the industry had expected.
The ministry expects the lower rate to force insurers to pay out more in cash to personal injury claimants to ensure that returns over their lifetime meet the awarded compensation.
The change will come into effect next month.
“The current legal framework makes clear that claimants must be treated as risk-averse investors, reflecting the fact that they may be financially dependent on this lump sum, often for long periods or the duration of their life,” the Ministry of Justice said in a statement.
The discount rate is calculated based on real yields on index-linked UK government bonds, but had not been changed since 2001 and so failed to account for a sharp drop in real yields, which are currently negative.
The Association of British Insurers, calling the move a “crazy decision”, said in a statement that motor and liability premiums would rise as a result. Consultants PwC estimated annual motor premiums would rise by £50-75 on average.
That means higher costs for motorists, after premiums rose 9.3 per cent last year due to tax increases, rising repair costs and whiplash claims.
However, the Association of Personal Injury Lawyers said in a statement that “people already coping with the most severe injuries have been deprived of the help and care they need for years”.
Barrie Cornes, analyst at Panmure Gordon, described the move as a “huge blow to insurers”.
Admiral estimated the net financial impact on 2016 reported profit at £70-100 million ($87-124 million).
— Reuters
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