Review of compensation rules could cut the cost of car insurance

Motor insurance costs could go down later this year, as the UK Government is reviewing the discount applied to injury pay-outs.

Lord Chancellor and Secretary of State for Justice David Gauke has confirmed that he has started a review of the personal injury discount rate, known as the Ogden rate, and will rule on whether it should be changed by 5 August.

The Ogden rate is a discount insurers apply when paying out lump-sum compensation for serious, life-changing injuries. It takes into account how much interest claimants can be expected to earn each year when the lump-sum payment is invested.

Previously the rate stood at 2.5% and claims were reduced in line with this. However, in a controversial move in 2017 it was adjusted to -0.75%, which meant that insurers would have to pay out more to claimants.

Insurance firms warned at the time that the change would lead to a significant increase in the cost of claims, and that these costs would end up being passed on to customers.

"We want the discount rate to be as accurate a reflection as possible of what happens when people receive a lump-sum payment, so it needs to reflect current investment practices and the investment environment," the Association of British Insurers (ABI) said in 2017.

The rate of -0.75% was based on "an outdated method which risks distorting the compensation process and pushing up insurance premiums", the industry body argued.

Welcoming the review, James Dalton, director for general insurance policy at the ABI, said last week: "Insurers remain committed to paying 100% compensation and want to see a process for setting the discount rate that delivers a fair outcome for claimants, motorists and taxpayers.

"The outcome of the review must deliver this, and we will continue to play our part to ensure that it does."

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