A difficult year for motorists and small businesses
Motorists and small businesses are facing a year of insurance premium rises following two recent Government decisions – the first, to increase Insurance Premium Tax, the second, to reduce the Discount Rate.
Read on to understand what the changes mean for you, and what you can do to minimise their impact.
What is the Discount Rate?
Also called the Ogden Rate, it’s a calculation used by the courts to work out how much compensation should be paid to victims with life-changing injuries. When claimants accept lump sum compensation payments, the actual amount they receive is adjusted according to the interest rate they can expect to earn by investing it.
What is the impact of the change to the Discount Rate?
The Discount Rate had been 2.5% since 2001, but has now been revised down to minus 0.75%. The following calculation shows what this means for compensation pay outs:
Prior to the change, an insurer would be required to pay out £975 to cover a £1000 compensation award because:
£975 x 2.5% = £25
£1000 - £25 = £975
Now, however, the insurer would have to pay out £1007.50 to cover the same award because:
£1000 x -0.75% = £7.50
£1000 + £7.50 = £1007.50.
While the impact may not seem huge on these lower value claims, significant differences emerge for high value claims from young people (whose life expectancy means they’ll be earning less on their lump sum payment for longer); one insurer estimates that a 20 year-old male with a claim of £5m will now receive £9,904,348 – an increase of 98%.
So what does this mean for me?
It’s highly unlikely that you’ll ever need to make such a significant personal injury claim, but that doesn’t mean that the changes to the Discount Rate won’t affect you.
The reduction in the Discount Rate is estimated to cost the insurance industry £5.8bn, which in turn means motor and liability insurance premiums are likely to rise. Motorists can expect average premium increases of £50-75 per policy, with substantially higher rises for younger and older drivers – some estimate up to £1000 and £300 respectively.
What about Insurance Premium Tax?
Insurance Premium Tax (IPT) is levied on general insurance premiums. Three successive hikes have increased the rate from 6% in November 2015 to 12% from June 2017, adding an average of £10 to annual car insurance costs. And because IPT is calculated as a percentage of your premium, those motorists already paying the most – younger and older drivers – will see their costs increase even more.
What can I do about it?
With insurance costs on the rise, you may have to work harder to find a good deal. Make sure that you always shop around at renewal time – a broker can do all the legwork for you.
Even if your policy isn’t due for renewal, you might still be able to find a better deal. Your insurer may charge a cancellation fee if you switch mid-contract, but if your savings are greater than the fee, it’ll still be worth it.
Remember, though, that low cost isn’t the same as good value. If the policy you buy doesn’t provide the cover you need, it doesn’t matter how much money you saved on the premium, you’ll still be out of pocket when you come to make a claim. Use a broker to help you find the right cover at the right price.
 Aon Benfield
 Willis Tower Watson
 The AA