Cheaper car insurance thanks to government U-Turn over Ogden rate

U-Turn SignWith rising fuel prices and increasing insurance costs motorists are having a tough time. However, it’s not all doom and gloom; proposed changes to a little-known financial formula called the Ogden rate could cut insurance bills by hundreds of pounds.

Don’t worry if you haven’t heard of the Ogden rate, you’re not alone, but it does affect the cost of your car insurance. The Ogden rate is used to calculate the lifetime amount of compensation due to someone with serious injuries following a collision.

Insurers pay-out a lump sum, but so they don’t ‘over compensate’, the total is discounted by the amount the award would earn in interest (the Ogden rate). Until February 2017 the Ogden rate was set at 2.5%, which meant that for every £1,000 award the claimant would be paid £975.

Medical bills quickly add-up and seven figure sums aren’t uncommon; so even a small change in the Ogden rate will make a big difference to overall insurance costs. With interest rates at a historic low the government was concerned that claimants might be left short-changed and decided to change the rate from 2.5% to -0.75%.

Remember, the lower the Ogden rate; the higher the pay-out, and now claimants were being awarded £1,007.50 for every £1,000 of loss. Insurance companies were about to be hit with a big bill and share prices tumbled overnight while car insurance premiums soared.

Financial analysts at PwC calculated that the changes added £75 to the average policy and were expected to add a further £100 to the cost of cover by the end of the year. Younger drivers were hit the hardest with policies shooting-up by £250 and anticipated to rise by an extra £300-500.

Understandably the motoring community and the insurance industry weren’t happy and began lobbying the government. The public outcry made such a noise that the Ministry of Justice was forced to listen and perform a U-turn. They are proposing new legislation which will set the Ogden rate at between zero and one percent, and average premiums are expected to drop by £21.

Huw Evans of the Association of British Insurers commented “This is a welcome reform proposal to deliver a personal injury discount rate that is fairer for claimants, customers and taxpayers alike. If implemented it will help relieve some of the cost pressures on motor and liability insurance in a way that can only benefit customers.”

 

 


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