Insurance Premiums set to soar
Insurance Premiums set to rise again!
Motorists already face a tough time with rising costs of just about everything to do with motoring, from fuel increases, car tax changes and insurance premium tax (IPT) increases.
Now, the Lord Chancellor and Justice Secretary, Liz Truss, has added to the burden and announced a reduction to the Ogden Discount rate from 2.5% to -0.75%. This is probably a rate that you have never heard of or know anything about, but it is something that affects all of your insurance premiums.
What is the Ogden rate?
The rate is a discount rate allowed insurers settling personal injury claims – whether that is due to motor accidents, accidents at work or accidents on public property or business premises.
When a claim is agreed, the discount rate, or Ogden rate as it is officially known, allowed insurers to discount the settlement by 2.5%.
Why was it there?
The discount rate was there to be fair to insurance companies who paid out compensation in a single lump sum. The recipient of the compensation was able to invest the money, and therefore increase the amount significantly over time. This is why the payout by insurers was reduced by, for the last 16 years, 2.5%.
What has changed?
The rate has now been reduced and now carries a loading meaning the insurer has to pay out more than the claim settlement figure. This results in more money for the claimant but also, much higher costs to the insurer.
Why has it changed?
The basis of the calculation now assumes that victims are risk averse and would invest the money in government bonds, which, when inflation is taken into account, actually provides negative returns.
How will it affect you?
The change means that insurance companies are going to have significantly higher claims costs and therefore will have to increase premiums to cover that additional cost.
This will be done through the increase of insurance premiums, and the Association of British Insurers (ABI) expect the average rise to be £50-£75 per policy for most motorists. However, they also point out that young drivers, typically those under 22, and older drivers typically over 65, will see their insurance premiums rise by larger amounts, estimated up to £1,000 for young drivers and £300 for older drivers.
The Ministry of Justice has accepted that it will have a significant impact on the insurance industry and the NHS, after the BBC reports that it could increase the negligence claims bill of the NHS by £1bn.
Ageas, have announced that they will have to put aside an additional £85m to account for the increase in costs, affecting their 2017 results.
Aviva have also indicated the change will affect their profits by £385m.
ERS, a leading A+ rated Lloyds motor insurer set aside funds ahead of the announcement, but stressed that the rate is below anything they expected. ERS CEO, Ian parker said this;
“The rate change will undoubtedly test the resolve of those motor insurers who are trading on minimal margin and with bare minimum capacity. With three exits in the last few months, we would not be surprised to see more insurer collapses following this announcement, making it more critical than ever for brokers to consider carriers with the guarantee of a strong credit rating.”
LV, another major insurer in the UK have announced “premiums will be impacted as soon as practicably possible” to cover the increase in costs.
So, what will happen now?
The day after the announcement was made, CEOs from 15 major insurers and the ABI met with the Chancellor of the Exchequer to lobby against the change which comes into place on 20th March 2017.
It was announced that evening, that the Chancellor, Phillip Hammond, has said the government will urgently consult on future changes, along with bringing forward any future legislation at an earlier stage. A consultation could be made “before Easter” on how the system can be fairer for all.
However, if things remain as they now are, premiums are expected to rise almost immediately.
Speak to us at Fiveways to get the best advice and ensure that you are getting good value for money when it comes to your insurance. We deal with dozens of the top rated insurers not only offering you security and peace of mind, but enabling us to always search for the best price, something we diligently do for our clients each and every year.
If you would like to know any more, give us a call on 01952 812380 or email firstname.lastname@example.org. We will also post any updates on our website.