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Insurers want rate change

Cost of claims driving up car insurance

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Insurance premiums could rise


Drivers in nearly all age groups are paying record amounts for their car insurance and could face further increases unless the Government takes action to reduce claims costs, the ABI warned today. 

All age groups except those under 21 – where the increasing use of telematics is keeping premiums under control – faced increases in their average premium.

Those in their late 50’s and late 80’s faced the highest rises – nearly £35 in the year.

Those aged 18-20 paid the highest average premiums last year at £973, with those aged 66-70 paying the least at £260. 

Average motor insurance premiums by age band  

Age of Policyholder

Average Premium (£)

Annual premium increase (£)

Annual premium increase (%)

Average Claim (£)

Claims Frequency (%)

18-20

973

-24

-2.37%

4,625

13.65%

21-25

676

0

0.01%

3,273

11.00%

26-30

521

28

5.71%

2,958

9.72%

31-35

450

23

5.49%

2,635

9.42%

36-40

413

27

7.07%

2,556

9.09%

41-45

373

23

6.69%

2,400

8.85%

46-50

354

18

5.44%

2,320

8.26%

51-55

339

30

9.61%

2,316

7.69%

56-60

311

34

12.19%

2,187

7.29%

61-65

283

23

8.73%

2,161

7.06%

66-70

260

14

5.51%

2,200

6.71%

71-75

276

14

5.51%

2,399

6.67%

76-80

320

23

7.69%

2,824

7.18%

81-85

398

29

7.75%

3,367

7.34%

86-90

476

33

7.40%

3,420

7.99%

91+

546

32

6.25%

5,559

8.82%

The latest figures pre-date the Government’s decision to cut the personal injury Discount Rate which substantially increases claims costs. It is a figure used to help set compensation pay-outs when people suffer serious injuries, for example following a car crash or medical negligence. It was reduced from 2.5% to -0.75, effective from 20 March.

The industry had expected the rate to fall to between 1.5% and 1%. The ABI said the Ministry of Justice’s new figure was based on an outdated method which risks distorting the compensation process which will “inevitably” lead to higher premiums. It says recent increases in Insurance Premium Tax will also have an impact on the cost of insurance.

It adds that the Discount Rate is costing the NHS £1 billion a year. At the time of the cut analysts PWC estimated it could see premiums rise by up by £50 – £75 on average, with young people facing the biggest increases. 

ABI Director General, Huw Evans, said:With inflation on the rise, motor premiums at a record high and the public purse under pressure, it’s concerning that the Government have yet to commit to delivering a fairer system for setting the personal injury Discount Rate.

“We’re pleased the Government are going to bring forward a Civil Liability Bill to reform whiplash style personal injury compensation, but the benefits could be wiped out if they don’t defuse the Discount Rate bombshell. 

“At a time when politicians from all parties are calling for additional investment in public services, setting a Discount Rate that is fair for claimants, customers and taxpayers could contribute up to £1bn a year to help fund this.” 

The most recent ABI motor premium tracker for Q1 this year shows the average premium paid at £462, up by 8% since Q1 2016 and adding an extra £33 a year to the cost of insurance. 

A number of insurers have already publicly confirmed that premiums have gone up as a result of the decision in February to cut the Discount Rate from 2.5% to -0.75%.

The ABI has also warned that, with such huge cost increases, these initial premium rises are likely to be followed by further waves of increases that will take place between now and the beginning of next year.

This is because reinsurance renewals are due around now or at the beginning of 2018. Many insurers choose to reinsure against large risks, such as catastrophic personal injury claims, which means some of the impact of the recent change will so far have been absorbed by existing reinsurance contracts.

But given the size of the Discount Rate cost impact, reinsurance premiums are likely to increase on renewal. This will add to insurer costs which will inevitably feed through to the premiums insurers have to charge customers.

Most reinsurance renewals will take place in January 2018, meaning the third wave of increases could well be the largest if a new rate has not been set by then. 

What is the discount rate?

When victims of life-changing injuries accept lump sum compensation payments, the actual amount they receive is adjusted according to the interest they can expect to earn by investing it.

In finalising the compensation amount, courts apply a calculation called the Discount Rate (also known as the Ogden rate) – with the percentage linked in law to returns on the lowest risk investments, typically Index Linked Gilts.

The law states that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on this lump sum, often for long periods or the duration of their life.

Compensation awards using the rate should put the claimant in the same financial position had they not been injured, including loss of future earnings and care costs.

Changes to the discount rate

The Discount Rate was lowered from 2.5% to minus 0.75% from 20 March this year.mIt means compensation payments rise. For example:

  • Under the old rate, an insurance company would need to pay out £975 to a claimant to cover a £1,000 loss. That’s because:
  • £975 x .025 = 25
  • £1000 – £25 = £975
  • The claimant was expected to earn 2.5% interest a year on a lump sum payment of £975, which would yield £1,000
  • Under the new -0.75% rate, the insurance company has to pay £1,007.5 in compensation because:
  • £1,000 x 0.0075 = £7.5
  • £1,000 + £7.5 = £1,007.5

The government admitted that it was also likely to have a significant impact on the insurance industry and a knock-on effect on public services with large personal injury liabilities – particularly the NHS.

Four key pledges were made:

  • the government was committed to ensuring that the NHS Litigation Authority had appropriate funding to cover changes to hospitals’ clinical negligence costs
  • the Department of Health woud work closely with GPs and Medical Defence Organisations to ensure that appropriate funding is available to meet additional costs to GPs, recognising the crucial role they play in the delivery of NHS
  • the government launched a consultation to consider whether there is a better or fairer framework for claimants and defendants, with the government bringing forward any necessary legislation at an early stage
  • Chancellor Philip Hammond met representatives of the insurance industry to assess the impact of the rate adjustment

The consultation considered options for reform – including whether the rate should in future be set by an independent body; whether more frequent reviews would improve predictability and certainty for all parties; and whether the methodology is appropriate for the future.

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