Rising by more than five times the rate of inflation on 2016, motor insurance premiums hit their highest recorded levels last quarter. Tax increases, escalating repair costs and the rising costs of whiplash style injury claims are the main reasons for the hike in costs.
To make matters worse, there are fears that the Ministry of Justice (MoJ) may be about to pile on even more pressure through a cut in the discount rate – a mechanism used by the courts to adjust large compensation payments to take account of future investment returns.
The Association of British Insurers (ABI) Motor Premium Tracker, the only survey to measure the prices consumers actually pay for their motor cover rather than quotes, shows that in the fourth quarter of 2016:
- The average price paid for private comprehensive insurance was £462 up from a previous high of £443 in Q2 2012.
- The average premium over the whole of 2016 is now 9.3% higher than the average premium over the whole of 2015.
Rob Cummings, ABI’s Assistant Director, Head of Motor and Liability, said: “These continue to be tough times for honest motorists. They are bearing the brunt of a cocktail of rising costs associated with increasing whiplash style claims, rising repair bills and a higher rate of Insurance Premium Tax.
“While we support the Government’s further reforms to tackle lower value whiplash costs, it must not give with one hand and take away with the other. The sudden decision to review the discount rate has the potential to turn a drama into a crisis, with a significant cut throwing fuel on the fire in terms of premiums.
“Insurers are open to a proper dialogue on how to reform the system and urge the Lord Chancellor to engage with the industry about setting a rate that is fair for both claimants and customers.”
Why are motor insurance premiums going up?
Tax: Since the July 2015 budget there have been three separate increases in the rate of Insurance Premium Tax, which means that the tax will have doubled from 6% to 12% when the latest rise comes into effect on 1 June this year
Personal injury claims like whiplash: The average bodily injury claim settled in Q3 2016 came to £10,674 – a 2.3% increase on the same period last year
Rising repair costs: The average repair bill has risen by nearly 32% in the last three years to £1,678 in Q3 2016. This is due to increasingly complex vehicle technology and rising cost of spare parts due to currency fluctuations
How does the discount rate affect motor insurance premiums?
The discount rate adjusts amounts of money awarded as personal injury damages to take into account the return which can be expected when that lump sum is invested. Since 2001 it has been set at 2.5%.
There is concern that the MoJ could be about to announce a new figure based on an outdated method which doesn’t take into account how claimants actually invest compensation and risks pushing up insurance premiums.
Changes in the discount rate would impact claims often worth millions of pounds, so even a change of one half of a per cent will have a substantial impact.
For more information see the ABI’s special briefing here.