Drivers to be hit with 10% increase on car insurance
THE multi-billion-pound cost of Government reforms to compensation payouts for life- changing injuries was revealed last night.
Drivers face a £2billion rise in car insurance premiums – equal to 10 per cent, or an average £50 each, the Office for Budget Responsibility revealed.
Meanwhile, the NHS will be hit with an extra £6billion to cover the cost of any compensation claims against it in the courts.
The massive costs follow the shake- up to injury payouts announced by Justice Secretary Liz Truss last month.
Chancellor Philip Hammond also admitted that the revamp would cost the NHS dear, telling MPs: ‘We will protect the NHS from the effects of the changed personal injury discount rate, and have set aside £5.9billion to do so.’
The huge bill follows the first change since 2001 to the so-called discount rate, which is used to calculate how much insurers pay to victims of accidents.
Courts calculate compensation based on loss of earnings and the cost of care. But they also work out how much payouts should be adjusted based on the likely interest that victims with ‘ catastrophic’ injuries would earn on the money during the long term.
It was set at 2.5 per cent in 2001 but has not been changed since, despite a huge fall in interest rates in the intervening 16 years.
Following the decision by Lord Chancellor Miss Truss, the rate will fall to -0.75 per cent on March 20. This means insurers will have to pay out more in compensation on the assumption that victims will actually lose money by investing the money every year.
Miss Truss’s change to the rate follows the threat of legal action by personal injury lawyers.
Officials defended her decision, saying that victims with ‘catastrophic life- changing injuries’ were getting a ‘raw deal’ under the current rate.
Last night however, insurers said the decision taken by Miss Truss was ‘avoidable’. Huw Evans, director-general of the Association of British Insurers, said: ‘Today’s Budget confirms a massive £6billion hit to the NHS caused by the Lord Chancellor’s decision to cut the personal injury discount rate to -0.75 per cent.
‘This extraordinary bill for taxpayers – bigger than any other in this Budget – shows how absurd this avoidable decision was.
‘The OBR has also confirmed that this will lead to higher inflation for years to come as the effects of such a massive increase in claims costs are felt by customers.
‘This makes it even more urgent that the Government deliver a fair deal for consumers and claimants by bringing forward changes to the law this year.’
Backbench Tory MPs urged minister to reconsider.
Jacob Rees-Mogg told the Commons that ministers should ‘not proceed’ with the change, calling it a ‘mistake’ and an ‘undue cost to the Exchequer’. He called for a law to change how the discount rate was calculated in future.
The OBR said it expected the increased costs to insurers would be recouped in full from insurance premiums. The average driver pays a record high of £462 a year in vehicle insurance, meaning premiums are likely to rise by around £46 this year.
But older drivers are likely to face an even greater rise – estimated at up to £300.
Such is the size of the impact, that it will increase one of the official measures of inflation by 0.2 per cent by next year.
The OBR said: ‘We assume that these costs will be fully passed on to consumers, raising motor insurance premiums by around 10 per cent this year.
‘It may also have pushed premiums up in recent months, as the industry anticipated a change. We also assume that this change will raise the cost of public and employer liability insurance.’
As a result, consumers are predicted to reduce how much insurance cover they have.
Miss Truss has also announced a review of the policy to consider whether there is ‘a better or fairer framework for claimants and defendants’. This raised hope that it could be abandoned.
Families will also be hit with a rise in insurance premium tax – a levy on premiums.
As a result, the tax will raise £18billion over the next three years from car, home and private medical cover.
The increase – which will be the third in two years – is due to come into force in June.
Insurance premium tax was at 6 per cent for several years until former chancellor George Osborne raised it to 9.5 per cent in November 2015.
It is now 10 per cent, and will jump to 12 per cent on June 1 – meaning the tax will have doubled in less than two years.