Car insurance hit by compensation changes: Why are motorists' insurance premiums set to soar?

  • ITV News Business Editor Joel Hills explains the changes

Young drivers could be forced to pay £1,000 a year more to insure their vehicles as millions of motorists see their premiums driven up by a Government change to compensation payments.

Average car insurance premiums could rise by up to £75 a year as a result of new rules, which take effect on March 20, to calculate the award to those with life-changing injuries.

The changes, described as "crazy" and "reckless in the extreme" by insurers, could also see the NHS forced to find an extra £1 billion to cover the increased compensation payouts.

Why is it happening?

The Ministry of Justice has made changes for the first time in 16 years to protect the investments of the money awarded to injury victims.

The lump sum compensation takes into account the potential earnings the victim will make from investments in government bonds (the lowest risk available).

The current investment would become negative after inflation is taken into account so a change was ordered.

The calculation - known as the Discount Rate - was 2.5% but it will now change to minus 0.75% which means far higher payouts for victims and a notably higher cost for their insurers.

As a result, premiums will rise to protect profits, impacting on millions of motorists.

Why do insurance companies say it's crazy?

Insurance companies estimate up to 36 million insurance policies will be impacted. Credit: PA

The Association of British Insurers says it estimates up to 36 million individual and business motor insurance policies could be affected in order to "overcompensate" a few thousand injury claimants a year.

Director general Huw Evans said the ABI had warned the government "repeatedly" that the change could lead to price hikes, with young drivers set to find it harder to afford insurance.

The AA's director of insurance Michael Lloyd said it was an "astonishing" decision and warned young drivers might be encouraged to take "dangerous and illegal steps such as trying to get a parent to illegally 'front' their insurance or even attempt to drive without cover".

What was the political reaction to the changes?

Liberal Democrat leader Tim Farron said public services will be hit in the long term. Credit: PA

Liberal Democrat leader Tim Farron described it as "another Government omnishambles" that showed ministers had failed to think through the consequences of their actions.

"The 'just about managing' have been slapped with a further tax hike by this Government," he said. "Further down the track this will have huge repercussions for our public services.

Even the Tory chairman of the Commons Treasury Select Committee said the move had a "look of absurdity about it".

But Andrew Tyrie acknowledged Lord Chancellor Liz Truss "appears to have had little choice" under the current legal framework.

He welcomed a move by the Government to now look again at ways to change the way in which compensation is calculated.

What was the government's response to the criticism?

The announcement from Lord Chancellor Liz Truss to the London Stock Exchange was greeted with dismay in the insurance industry. Credit: PA

Ms Truss said the change was the only "legally acceptable" course of action open to her, which is designed to protect claimants.

"The law is absolutely clear - as Lord Chancellor, I must make sure the right rate is set to compensate claimants," she said.

A No 10 spokesman confirmed estimates of an extra £1 billion to the NHS's insurance costs were "broadly in the right ballpark" and confirmed the health service would get the funding to settle the higher medical negligence claims.

Downing Street said Chancellor Philip Hammond would be meeting with the insurance industry to discuss the implications of the changes.