Drivers look set to benefit from a smaller-than-expected rise in car insurance after Ministers unveiled an overhaul of injury compensation rules yesterday.
The average premium could be around £23 a year less than feared if insurance companies pass on the changes to motorists in full.
But experts warned that families will still be paying some £40 more than they were a year ago because yesterday’s proposals do not fully reverse reforms to compensation rates introduced in February.
Campaigners welcomed the compromise – which followed a fierce backlash by motorists and insurers – but warned that drivers continue to face ‘a worryingly steep upward curve for car insurance’.
Price comparison website comparethemarket.com said the average premium has jumped by nearly 40 per cent to £739 in the past three years.
The average premium could be around £23 a year less than feared if insurance companies pass on the changes to injury compensation rules to motorists in full
Drivers under the age of 25, who are deemed higher risk, pay an average of £1,354, with hikes in insurance premium tax adding to the pain for motorists.
James Daley of consumer group Fairer Finance said: ‘There is still going to be a hit as a result of these changes. It is going to be felt in drivers’ pockets. But it is not as bad as it might have been. There has been a compromise.’
The latest row over the soaring cost of car insurance stems from changes to the so-called ‘Ogden discount rate’ made in February.
Victims of serious accidents are typically paid a multi-million pound lump sum to support them for the rest of their lives.
The discount rate is meant to take into account the fact that this money is usually invested and will grow in value, meaning insurers do not need to pay out as much up front.
But record-low interest rates introduced by the Bank of England mean that returns are extremely poor at present.
As a result, the Ministry of Justice cut the discount rate from 2.5 per cent to minus 0.75 per cent in February – meaning insurers had to pay out far greater sums than before to victims.
This in turn pushed up premiums for millions of drivers as the insurance companies sought to cover their costs, sparking howls of criticism from motorists and the insurance industry.
Having launched a consultation in March, the Government yesterday announced a re-think that officials said ‘could see significant savings for motorists through lower car insurance premiums’.
The Ministry of Justice said that, if the discount rate were set today under the new approach, it might end up within the range of zero to 1 per cent.
While that would reduce upfront pay outs to victims of serious car crashes as well as medical negligence – easing the burden on insurance companies as well as the NHS – it could also see premiums fall.
But experts warned that families will still be paying some £40 more than they were a year ago because yesterday’s proposals do not fully reverse reforms to compensation rates introduced in February
Consumer groups urged insurers to pass the savings on in full to hard-pressed motorists.
Kevin Pratt, a consumer affairs expert at MoneySuperMarket, said: ‘Insurers have been quick to blame recent increases in motor insurance premiums on the change to the discount rate.
‘It’s vital that any reforms in their favour are reflected in price reductions without delay.’
Insurance giant LV= pledged to pass the savings on in full. Steve Treloar, managing director of general insurance at the firm, said: ‘The new system will not only ensure fair payments for those making claims but it will also help reduce the cost of car insurance for drivers at a time when premiums are at record highs for hard pressed motorists. LV= commits to passing on 100 per cent of the savings produced by this legislation.’
Stephen Hester, chief executive at RSA Group, added: ‘If passed, the benefits will be felt by all our customers, helping to stop the rot of steep rises in premiums.’
Colm Holmes, chief executive of Aviva’s UK general insurance business, said: ‘This is good news for our customers, as any measures which reduce the rising costs of insurance will directly feed through to premiums.’
Simon McCulloch, director at comparethemarket.com, said if the discount rate were set at 0.5 per cent it would reduce the average car insurance premium by around £23.
‘We should bear in mind, however, that the original changes to the rate in February this year added around £60 to motor insurance costs, so drivers are still paying more than they were last year as a result of the reforms,’ he added.
‘Whilst any changes which reduce costs will be welcomed by motorists, they should be seen in the context of a worryingly steep upward curve for car insurance driven by other factors too, such as the recent hikes in insurance premium tax.’