Many Britons, more so young people could be unable to afford cars in the future after insurers warned of higher annual premiums. The Association of British Insurers (ABI) puts typical cover costs at £462 and projects a yearly increase of 8% due to tax hikes and whiplash claims. This may see annual car insurance premiums in Britain increase to £1,000.
Elderly drivers haven’t been spared either. Drivers aged 65 years and above face an additional £300 charge. The typical comprehensive motor insurance policy premium in Britain also stands to increase by approximately £75 yearly to cater for the changes the UK government has made on personal injury payouts.
Although the changes favour victims of car crashes and medical negligence among other related car insurance incidents, the move puts more pressure on insurers, the National Health Service and other public bodies charged with the responsibility of paying the increased claims. According to Justice Secretary, Liz Truss, the changes have significant implications on both the private and public sector.
According to Mohammad Khan who is the Head of General Insurance at PwC, the changes will increase costs for drivers in the UK. Motor insurance prices are bound to increase. Khan also sees an increase in commercial insurance rates applicable to small businesses. Following the government changes, there is an anticipated increase of £50 to £75 in the cost of comprehensive insurance with the increase for both young and old drivers reaching £1,000 and £300 respectively.
According to Khan, the announcement, as well as the increase in IPT (Insurance Premium Tax), makes any prior savings enjoyed on premiums redundant. The government’s personal injury reforms were anticipated to offer an average savings of £40 for every motor insurance policy. Khan sees significant increases in the price of insurance for young and old drivers despite the fact that the increasing competitiveness in the insurance industry is expected to offer better prices.
Reinsurance prices are also expected to go up for liability and motor reinsurance covers. This will see most companies become over dependent on lower-level reinsurance companies whose cost of doing business is bound to increase after renewing their reinsurance.
Discount rate falls from 2.5% to -0.75% as of 20th March 2017
The discount rate had remained the same since 2001. When victims of serious car injuries accept compensation payments in a lump sum, the actual payment received is adjusted to account for the interest the amount is expected to earn after being invested.
Claimants have to be treated like risk-averse investors who are dependent on the amount they receive for a large part or the entire duration of their life. Compensation awarded using the discount rate is meant to put individuals in similar financial positions had they not suffered an injury, while taking into account their healthcare costs and future earnings.
The discount rate has fallen from 2.5% to -0.75% as of 20th March. Compensation payments have also increased. The effects of this decision will have a significant knock-on consequence on public services like the NHS facing large personal injury liabilities. The NHS saw its clinical negligence costs increase from £1.2 billion in 2015 to £1.5 billion in 2016 in England.
The insurance industry will also be affected significantly by the move. According to the Director General of ABI, Huw Evans, the decision to cut the discount rate from 2.5% to -0.75% is crazy and reckless. Evans sees a drastic increase in claims costs which will, in turn, increase the liability and motor premiums for countless drivers as well as business in the UK. Evans estimates that over 36 million policies will be affected just to compensate a few claimants every year.
While setting the rate, Ms. Truss who is a Justice Secretary and independent Lord Chancellor claimed she was confident she set the only legally acceptable rate. Many are however of the idea that the rate is still unfair. For instance, Liberal Democrat Leader Tim Farron feels the rate is unfair to young people who may very well be unable to afford cars as the cost of insurance rises to £1,000.
Although the UK government promises to fund the NHS Litigation Authority appropriately to cater for the changes to clinical negligence costs in hospitals as well as ensure a closer working relationship between GPs and the Department of Health, insurance costs are still expected to rise drastically. Other measures such as consultations meant to create a better framework for defenders and claimants are also expected to bear little fruit if they are not followed by serious changes.