Car insurers have expressed optimism that a looming rise in premiums may be stemmed following fresh Government proposals on how compensation payouts are calculated.
Insurers had condemned a new formula introduced by ministers in March as “crazy”, claiming the changes would result in higher insurance bills for millions of motorists and land the NHS with a £1bn bill for settling medical negligence claims.
The shake-up centres on the way courts award lump sum payments to people suffering long-term personal injuries.
Those receiving awards are able to potentially increase the sum by investing the money, so a portion is deducted from the total.
This “discount rate” had been set at 2.5% since 2001, but the Government cut it to -0.75% – a decision which was slammed by the insurance industry.
Accountants PwC had suggested that between £50 and £75 would be added to the average car insurance policy, with hikes of up to £1,000 for younger drivers aged 18 to 22 and £300 for motorists aged over 65.
A consultation was subsequently launched to decide if there was a “better or fairer framework for claimants and defendants”.
Ministers on Thursday stopped short of raising the rate immediately. But said if the new system being proposed was applied today the rate might be in the region of 0% to 1% – so not in negative territory.
Image: Justice Secretary David Lidington says the rate will be reviewed regularly
The new proposals still need to be approved by Parliament and will not be applied retrospectively, the Ministry of Justice added.
Responding to the announcement, Huw Evans, director general of the Association of British Insurers (ABI), said: “This is a welcome reform proposal to deliver a personal injury discount rate that is fairer for claimants, customers and taxpayers alike.
“The reforms would see the discount rate better reflect how claimants actually invest their compensation in reality and will provide a sound basis for setting the rate in the future.
“If implemented it will help relieve some of the cost pressures on motor and liability insurance in a way that can only benefit customers.”
However, the rethink could potentially reduce payouts to victims.
Brett Dixon, president of the Association of Personal Injury Lawyers, said the new rate “must be set to meet the needs of catastrophically injured people”.
He added that lower insurance premiums were “of no benefit if (customers) are severely injured and forced to take risks with the compensation they so desperately need”.
Justice Secretary David Lidington said: “We want to introduce a new framework based on how claimants actually invest, as well as making sure the rate is reviewed fairly and regularly.
“In developing our proposals, we have listened carefully to the views of others, and we will continue to engage as we move forward.”