Insurance premiums for drivers could rise by as much as £1,000 after Government changes injury payout scheme

Young people could be priced out of owning a car after insurers warned their annual premiums could rise by up to £1,000.

Drivers aged over 65 could also face an extra £300 charge, while the average comprehensive motor insurance policy could increase by up to £75 a year to cope with changes the Government has made to personal injury payouts. 

Justice secretary Liz Truss announced that those affected by medical negligence, car crashes and other incidents will get more money after changes to the way lump sum payouts are calculated.

But the move will put increasing pressure on insurers, the NHS and other public bodies who are responsible for paying out the increased claims. 

Ms Truss warned in her statement of the "significant implications across the public and private sector".

Mohammad Khan, UK general insurance leader at PwC, said the change will see costs for drivers rise. 

He said: "Unfortunately, this announcement will have a significant adverse impact on motor insurance prices that drivers pay and also commercial insurance rates paid by small businesses.

"As a direct result of this change, 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 year olds) and a rise of up to £300 for older drivers (over 65 years old).

"This announcement, on top of the recent increases in insurance premium tax, will make redundant any savings to premiums as a result of the government’s personal injury legal reforms which were anticipated to generate approximately £40 saving per motor insurance policy"

He added: "Due to the competitive nature of the insurance industry, policyholders should be able to reduce any impact by shopping around but younger and older drivers will see significant price increases regardless.

"The announcement will also impact reinsurance pricing by pushing prices up for motor and liability reinsurance cover.

"This may impact the business models of  companies that rely on low layers of reinsurance who will be faced with much higher costs of doing business after they renew their reinsurance."

The measure, announced by Lord Chancellor Liz Truss on Monday to the London Stock Exchange, relates to a calculation called the Discount Rate, which has been unchanged since 2001.

When victims of life-changing injuries accept lump sum compensation payments, the actual amount they receive is adjusted according to the interest they can expect to earn by investing it.

In finalising the compensation amount, courts apply the Discount Rate, with the percentage linked in law to returns on the lowest risk investments, typically Index Linked Gilts.

Claimants must be treated as risk-averse investors who are financially dependent on the lump sum, often for long periods or the duration of their life.

Awards using the rate should put them in the same financial position had they not been injured, taking into account loss of future earnings and care costs.

From March 20, the Discount Rate will fall from 2.5% to minus 0.75%.

As well as seeing compensation payments rise, the decision will have a knock-on effect on public services with large personal injury liabilities such as the NHS, which saw clinical negligence costs in England rise from £1.2 billion in 2014/15 to £1.5 billion the following year.

The move is also likely to have a significant impact on the insurance industry.

Huw Evans, director general of the Association of British Insurers, called the decision "crazy" and "reckless in the extreme".

He added: "Cutting the discount rate to minus 0.75% from 2.5% is a crazy decision by Liz Truss.

"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.

"We estimate 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."

Ms Truss is also Justice Secretary, but made the decision in her capacity as independent Lord Chancellor.

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."

Tim Farron, the Liberal Democrat leader, said: “This will be particularly unfair on young people, who could be driven off the road by rises of £1,000.

"They already face huge generational unfairness and this is just another example of those who can least afford it being punished simply for being young.”

The Government says it will ensure the NHS Litigation Authority has appropriate funding to cover changes to hospitals' clinical negligence costs, while the Department of Health will work closely with GPs.

Ministers will also launch a consultation to consider whether there is a better or fairer framework for claimants and defenders, and Chancellor Philip Hammond will meet representatives of the insurance industry to assess the impact of the rate adjustment.