INSURANCE HIKES: NOW THE RETREAT
After 24 hours, backlash sparks review
AN URGENT review was ordered last night into a car insurance shake-up set to penalise millions of drivers.
Justice Secretary Liz Truss set an injury payout rate on Monday that adds up to £300 to the premiums of older drivers. But just 24 hours later Philip Ham- mond has signalled a retreat after a hastily convened summit with insurance industry executives.
They urged the Chancellor to block Miss Truss’s decision, which was described as ‘crazy’ by the Association of British Insurers.
Mr Hammond promised an urgent review of the compensation rate and suggested the law could be changed within months.
Experts say businesses also face huge increases in their public and employer liability premiums when many are already facing crippling increases in business rates.
Former pensions minister Ros Altmann described Miss Truss’s decision as ‘unreasonable and economically unsound’. The row centres on
a change to the so-called Ogden rate, which is used to calculate how much insurers should pay to victims of major accidents.
Courts calculate compensation based on loss of earnings and the cost of care. But they also work out how much it should be adjusted based on the likely interest victims with ‘catastrophic’ injuries will earn over time.
It was last set at 2.5 per cent in 2001 but has not been changed despite huge falls in interest rates. Following Miss Truss’s decision the rate will fall to -0.75 per cent on March 20, meaning insurers will have to pay out more on the assumption that the victims will lose money every year.
Her decision follows impending legal action by personal injury lawyers. Ministers feared following legal advice that without a decision the courts would make the change for them and the outcome could be worse.
Last night officials defended the decision saying victims with ‘catastrophic life changing injuries’ were getting a ‘raw deal’.
Aides insisted Miss Truss had ‘no choice’ and was making a difficult choice dodged by her predecessors.
The Ministry of Justice said the law made it clear that claimants must be treated as ‘risk averse investors’ as they are financially dependent on the lump sum, often for long periods or the rest of their life. As a result the
‘Unreasonable and unsound’
rate is set on the basis of government gilts – currently paying out negative returns.
But Lady Altmann said: ‘This seems unreasonable and economically unsound. It is wholly misguided for long term insurance settlements to be based on negative interest rates. The idea that interest rates will remain negative in the long term is unthinkable.
‘This will add to the cost of insurance claims and will sharply increase premiums for ordinary households and small businesses already under pressure.’
Overall, motor insurance premiums could rise next year by a total of £3.6billion – hitting drivers with an average increase of £100. Insurance bosses called for a swift change in the law through the Prison and Courts Bill to stop the change hitting motorists, businesses and taxpayers.
In a joint statement issued with Huw Evans, director-general of the Association of British Insurers Mr Hammond said the Ministry of Justice would launch an urgent review.
He said: ‘ Claimants must get the money they’re entitled to following an injury in order to support their future needs. It is important that going forward, personal injury discount rates are set at a level that is fair to both claimants and consumers.
‘ The Government will progress urgently with a consultation on the framework for setting future rates, and bring forward any necessary legislation at an early stage.’
The Government has already faced a bruising backlash from firms over reforms to business rates that will see around half a million companies pay more. The Chancellor is expected to announce a relief package for the worst hit in the Budget next Wednesday.
Last night’s announcement will bring hope that premiums could eventually fall and the rate could be changed within months.
Accountancy firm PWC said businesses will see premiums on their employer liability insurance rise by between 5 per cent and 15 per cent, adding hundreds or even thousands of pounds to their annual bill.
Millions of businesses have to take out the cover which pays out if a member of staff is injured at work.
Many firms – such as retailers – also need public liability insurance which covers them if a member of the public is hurt on their premises.
Mr Evans said: ‘It makes no sense to do something that will cost motorists, businesses and taxpayers so much at such a difficult time based on a broken formula.’