The government is setting a new formula for determining the compensation payments of car insurance. As announced by the UK Ministry of Justice, the new formula will apply for those who suffer from long-term injuries after a car accident. Experts say that the car insurance premiums will increase dramatically when the formula is effective, with an estimated annual increase by up to £75.
The Ministry of Justice said that the British government had no choice. The formula is resulting from the current law, even though the government is looking for every possibility, which will not put more burdens on its people. The new regulation will seemingly be refused by the people, since the Association of British Insurers (ABI) said that the regulation did not make sense.
What the New Formula of Car Insurance Premiums Means for Insurers
With the current regulation, the victim of car accident is awarded with compensation, which they can invest for many years. The compensation comes in a lump sum with a 2.5% discount rate, which reduces the amount the insurance companies pay for medical bills. With the new formula, the Ministry of Justice is going to reduce the discount rate to minus 0.75%.
The new interest rate is based upon the government bonds, which now is now negative, after considering the time inflation. The director general of ABI, Huw Evans, said that the new formula was a crazy decision. The claim costs will increase dramatically. It means that the insurance companies will increase liability premiums, which should be paid by the businesses and millions of drivers in the United Kingdoms. As a result, the insurance industry will be hit severely. For instance, Direct Line predicted that the decision will reduce its pre-tax profits by around £230 millions.
The new formula will also hit the drivers. Evans said that the decision will affect almost 36 millions of car insurance policies. Otherwise, the insurance companies will not be able to pay thousands of claims every year. Financial experts predicted that the car insurance premiums could accumulate to £1.000 every year for every driver under the age of 22 years. Meanwhile, the average drivers will pay an increase from £50 to £75 a year, while old drivers will pay an increase by about £300 a year.
What the New Formula of Car Insurance Premiums Means for the Drivers
On the other hand, the new formula will benefit the accident victims. The Association of Personal Injury Lawyers supports the decision, since the victims will receive higher payouts. Those who are deprived from injuries need help and money, which they can invest for years. The new car insurance premium formula is designed to benefit them.
To anticipate severe refusal from related parties, the government is going to launch a consultation mechanism to make the systems fairer. Even though it has no choice but to apply the new formula, the government will receive any constructive ideas to make the system work and to make sure that the right and fairer rate is set for both the claimants and the insurers.