We’ve all seen and heard the news that insurance premiums are likely to go up (again) and whilst there are various reasons for the price hikes, one of the key factors is the change to compensation rules.

When it comes to calculating compensation payouts, insurance providers reduce the total amount by what’s known as the ‘discount rate’ (sometimes known as the Ogden rate). Previously, the discount rate was set at 2.5%, the revised discount rate (which came into effect in March 2017) is now minus 0.75%.

If the whole concept of discounting compensation seems harsh, it’s because the assumption is that anyone receiving a payout, will invest their lump sum in sound government bonds. However, because of inflation, the value of bonds has decreased – lowering the discount rate is an attempt to make up the difference.

What this means, is that upfront compensation payments will be higher. Whilst that’s good news for the people that need it, it means higher costs for insurance providers who will often have no choice but to pass those increases on to us – the consumer.

The Association of British Insurers (ABI) has repeatedly warned that the changes will mean increases to the cost of insurance premiums. The discount rate is applied to vehicle and liability policies and the ABI have calculated that around 36 million motor insurance policyholders (both private and commercial) will be affected.

But it’s not just the devastating effect on purse strings at home and in the business world that the ABI are concerned about. They warn, that the change could mean the NHS ends up forking out an extra £1 billion in meeting compensation claims.

As a result, the ABI has outlined a set of proposals that they think will make the existing compensation framework fairer for everyone; the suggestions are:

• To provide claimants with 100% compensation
• Not to link assumptions on investment to one particular asset – there are a range of opportunities open to savvy investors and not just government bonds
• A dual discount rate to reflect different periods of investment
• A panel of experts (including insurance providers, solicitors and independent financial advisors) to help the government decide the discount rate each time it is reviewed

The ABI are clear that it’s not about reducing compensation, but it’s about making the system fairer for both claimants and consumers.

Critics of the discount rate have called the system ‘broken’ and the government has called for a consultation in order to review and reform the current rules over compensation payouts. The ABI’s proposals are in response to that consultation – so only time will tell if the government take on board any of the suggestions.

In the meantime, it’s clear that the only action consumers are left with, is to ensure they get the best value for money when it comes to their car, van, bike and liability insurance policies. So, stay safe and insured without being out of pocket and make sure you comparethemarket.com

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