- Ministry of Justice’s changes will hit taxpayers by £5.6bn over next five years
- Association of British Insurers has already registered a protest against change
- The Government feels it is necessary to reflect lower investment returns
- It will consider ‘whether there is a better or fairer framework for claimants’
The government’s spending watchdog has revealed that the shake-up on car insurance payouts will cost the taxpayer £5.6billion.
The amount, which is equivalent to the British public paying an extra 1p on the basic rate of income tax for a year, could add £70 on to the cost of the average car insurance policy.
The Ministry of Justice’s changes will see the expense hit taxpayers over the next five years and it has sparked anger at the Lord Chancellor, Liz Truss.
The Association of British Insurers has already registered a protest against the change and called for a government rethink.
Huw Evans, from the Association of British Insurers, told The Times: ‘This extraordianry bill for taxpayers, bigger than any other in this budget, shows how absurd his avoidable decision was.’
Admiral Chairman Alastair Lyons added: ‘We strongly support the Association of British Insurer’s call for a fundamental review of the basis on which the Ogden rate is set in order to ensure that the relevant compensation awards are set appropriately and welcome the intent of the Lord Chancellor and the Chancellor of the Exchequer to implement this review expeditiously.’
Shares in a number of insurance companies fell last week after Miss Truss announced the rule change.
The change, which begins on March 20, is centred on what is called the ‘Ogden discount rate.’ Accident victims are paid their compensation as one-off ‘lump sum’ which they use to help them financially over the rest of their lives.
This money can be invested however, increasing the total from the level of the original pay-out.
In view of this, for the past 16 years insurers have been allowed to apply a discount rate of 2.5 per cent to lump sum awards.
This rate is being slashed now to just 0.75 per cent, which raises the total cost insurers face and cuts away at their profits.
The government feels it is necessary to reflect lower investment returns that victims may hope to earn on large payouts.
The Ministry of Justice said it will begin a consultation to ‘consider whether there is a better or fairer framework for claimants and defendants’.
Amanda Stretton, former racing driver and motoring editor at Confused.com, advised how motorists can minimise the effects of these hefty prices.
She said: ‘Drivers will likely be enraged to find out there could be a further 10 per cent increase to their car insurance costs, amounting to an average of £50 on top of what they already pay and equivalent to a total rise of £2 bn.
‘This follows our most recent car insurance price index which revealed drivers faced a year-on-year price increase of 14 per cent in Q4 2016.
‘These additional increases, combined with rising fuel prices and increased motoring costs across the board, could result in a sizeable dent in drivers’ pockets.
‘Rising motoring prices make it crucial for drivers to reduce costs wherever they can and they will need to be as savvy as ever to find the cheapest and most suitable prices for all of their motoring expenses.
‘With that in mind, we would urge drivers to use our helpful guide to saving money on car insurance and shop around to find the best deals and slash running costs.’