Insurance payouts shake-up ‘to land NHS with £1 bn bill and hit drivers’

Insurance chiefs today warned of a £1 billion bill to the NHS and soaring car premiums due to changes to compensation payments.

They blasted the reforms unveiled by Lord Chancellor Liz Truss as “crazy” amid warnings that motor insurance for young drivers could rise by up to £1,000.

She defended the shake-up, which will increase compensation pay-outs, as legally necessary. The row centres on the so-called “discount rate” used by judges to calculate how much interest compensation payments will earn when invested by claimants, with a lower rate generating bigger initial payouts.

The Government cut the rate, which has not been changed since 2001, from 2.5 per cent to -0.75 per cent today, reflecting the current UK climate of low interest rates. But the move was immediately condemned by the Association of British Insurers.

Its director general Huw Evans said: “This is a crazy decision. 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.”

The ABI estimates that up to 36 million individual and business motor insurance policies could be affected in order to “over-compensate” a few thousand claimants a year. Comparison site comparethemarket.com said premiums could increase on average by almost £60, while riskier younger drivers could pay an extra £107 a year.

Mohammad Khan, UK general insurance leader at PwC, said: “We anticipate an increase of £50-£75 on an average comprehensive motor insurance policy, with higher increases for younger and older drivers — potentially up to £1,000 for younger drivers (18-22) and a rise of up to £300 for older drivers (over 65).”

Ms Truss stressed that the Government had to update the discount rate to take into account the economic reality of lower interest rates.

She said: “The law is absolutely clear, as Lord Chancellor, I must make sure the right rate is set to compensate claimants. I am clear that this is the only legally acceptable rate I can set.”

The Government has also pledged to ensure the NHS Litigation Authority has appropriate funding to cover the extra cost from the reform for hospital clinical negligence cases, while the Department of Health will work closely with GPs.

Experts also believe insurance companies will be able to limit insurance premium hikes by cushioning the blow from the changes through lower profits. The share prices of the UK’s two biggest car insurers, Direct Line and Admiral, were rocked today as investors digested the news.

Work and Pensions Secretary Damian Green was today set to defend new regulations on Personal Independence Payments after a tribunal ruled that claimants with psychological problems who cannot travel without help must be treated like those who are blind.