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Car insurance costs to rise by £75 as Government tweaks injury payouts

Sam Barker
Changes to Ogden rate will be passed down in premiums - AFP

Car insurance premiums are due to rise by up to £75 a year after the Government changed the rules on how much insurers must pay victims of serious crashes.

Insurers are likely to pass these higher costs on to consumers following Lord Chancellor David Gauke's decision to change the Ogden rate, or discount rate, from -0.75pc to -0.25pc. 

Insurers pay lump sums to serious crash victims to pay for their future care costs and loss of earnings. Because these payouts can be invested and could grow, the original cash payout is adjusted by the Ogden rate to compensate. 

The Ogden rate was 2.5pc from its introduction in 1996 until 2017. That system meant a claimant that was awarded £10,000 over their lifetime would have 2.5pc of that, or £250, deducted by insurers and receive a total of £9,750 to invest.

In February 2017 the Government cut the rate from 2.5pc to -0.75pc in a move that insurers called “crazy”. 

When the Ogden rate is negative, insurers pay out more upfront than a claimant is estimated to need. This is ensure that inflation and poor investment returns do not erode the figure.

When the rate was -0.75pc, claimants would get £10,075, and the new figure of -0.25pc means they will receive £10,025. 

A Ministry of Justice statement said today's change was meant to avoid overcompensating claimants but also reflect the fact they could be cautious investors.

But insurers will now raise their premiums to compensate, experts have said.

Mohammad Khan, of accountancy firm PWC, said: “The announcement today means that motor insurance premiums – which have been broadly stable this year and slightly lower than last year – will probably increase.

"The average motor insurance premium will probably increase by between £15 and £25 but younger drivers may see their premiums increase by about £50 to £75."

In September 2017 the Government began a review of the Ogden rate, hinting that it could move the level in insurers’ favour, ensuring they could pay less. 

Since then insurers have been underpricing car insurance to reflect an expected increase in the Ogden rate. But the rate rise today was smaller than insurers were expecting.

Huw Evans, of the Association of British Insurers, a trade body, said: “This is a bad outcome for insurance customers and taxpayers that will add costs rather than save customers money.”

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