Following the latest changes in the way compensation is calculated, the problems the car insurance providers predicted seem to be materialising. The car insurance industry has reported losses of £3.5 billion.

A revision in the way compensation is calculated means that insurance providers will now have to pay more money upfront. Compensation is worked out using something called the Ogden rate (sometimes known as the discount rate); it basically means that a percentage is taken off the final lump sum. That percentage used to be 2.5%, but it was revised earlier this year to -0.75%.

The reason why the Ogden rate changed is because when insurance providers decide on how much compensation to give, several assumptions are made on how the money will be used. The first assumption is that claimants will invest the money, secondly, it’s assumed that the money will be invested in government bonds. However, as the pound has devalued, the government decided to amend the discount rate to make up for it.

Although the Ogden rate amendment was introduced in February, the £3.5 billion loss has come from outstanding 2016 claims. For one insurance provider, it meant a £105 million drop in pre-tax profits (ouch).

But insurance experts are warning that it’s not just car insurance providers that will be badly hit – the public sector could also be in for an expensive time. The application of the new Ogden rate means that losses to public sector areas such as the NHS and the armed forces, could stand at £6 billion. Of course, no-one’s suggesting that genuine claimants aren’t deserving, critics have said it’s more a case of the entire system needs reviewing. The Association of British Insurers (ABI) have gone as far as to say the formula is ‘broken’ and that changing it was ‘reckless in the extreme’.

Ultimately, it could mean higher premiums for all of us, and let’s not forget the increase to insurance premium tax (IPT) which has risen to 12% , adding a further 2% to insurance costs since June 2017. Clearly, it’s not great news for consumers, who are already experiencing record highs in car insurance premiums.

So, naturally it means we’re all going to have to shake up the way we think about buying insurance; and if you don’t do so already, it means taking a long, hard look at whether you’re getting your money’s worth. Which is where we come in, let us help you comparethemarket.com for all your insurance needs – whether that’s car, home, pet, travel, business or health – trust us to do the searching for you.

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