Necessary Evil

Car insurance is set to rise in cost across the board this year and we are powerless to prevent it. It is has nothing to do with an increase in claims or insurance providers being greedy. I can’t even blame ambulance chasing solicitors that promise the earth on a ‘no win no fee’ basis. Damn it……not even Trump can be blamed for this one.

 

The blame lies at the door of the Government……the Ministry of Justice to be precise.

 

Here’s the background bit……

 

A new formula for calculating compensation payments for those who suffer long-term injuries has been announced by the Ministry of Justice.

 

Accident victims are paid compensation in a single lump sum, which in serious cases is supposed to support them for the rest of their lives. But someone who receives that lump sum can actually increase that amount by investing it, and getting a cash return. So to be fair to insurance companies, the payout is reduced accordingly.

 

For the past 16 years the ‘discount rate’ has been set at a typical rate of 2.5% - making the payout that much smaller. Now the Ministry of Justice has decided to reduce the discount rate from 2.5% to minus 0.75%. That will result in more money for the victim, but a higher cost for the insurer......which is being passed on to drivers.

 

The basis the Ministry of Justice has decided to reduce the discount rate from 2.5% to minus 0.75% was because the formula assumes the victim were to invest his or her money in Government Bonds. By the time inflation is taken into account, real returns on such bonds have become negative.

 

Huw Evans, director-general of the Association of British Insurers (ABI) summed things up perfectly……"Claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK. A crazy decision.”

 

A crazy decision in deed.