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Motorists facing hike in insurance premiums after compensation rule change

Millions of motorists are facing increased insurance premiums while the NHS will have to find an extra £1 billion following a change to the formula used to calculate compensation payouts.

Announcing the move, which is expected to see a sharp rise in personal injury payments, Lord Chancellor Liz Truss said the change was the only "legally acceptable" course of action open to her.

But the decision was greeted with disbelief by the insurance industry, which described the changes as "crazy" and "reckless in the extreme".

Downing Street said the NHS would get the additional funds it needs to meet the increased costs of settling medical negligence claims.

A No 10 spokesman confirmed that estimates that it would add £1 billion to the service's insurance costs were "broadly in the right ballpark".

Liberal Democrat leader Tim Farron said ministers had failed to think through the consequences of their actions, saying it was "another Government omnishambles".

The change, unveiled in an announcement to the London Stock Exchange, relates to the discount rate used to calculate payments to victims of life-changing injuries, which has been unchanged since 2001.

When victims of life-changing injuries accept lump sum compensation payments, the actual amount they receive is adjusted according to the interest they can expect to earn by investing it.

In finalising the compensation amount, courts apply the rate, with the percentage linked in law to returns on the lowest risk investments, typically index-linked gilts.

Ms Truss announced that from March 20, the rate would be cut from 2.5% to minus 0.75%, reflecting the changes in gilt yields.

Huw Evans, director general of the Association of British Insurers, called the decision "crazy", warning it would have a huge impact for individuals, businesses and public bodies.

"We estimate that up to 36 million individual and business motor insurance policies could be affected in order to overcompensate a few thousand claimants a year," he said.

"We have repeatedly warned the Government that this could lead to very significant price rises, with younger drivers in particular likely to find it much harder to get affordable insurance.

"It is also a massive own goal that lands the NHS with a likely £1 billion hike in compensation bills when it needs it the least."

The AA's director of insurance Michael Lloyd said it was an "astonishing" decision that would particularly hit younger drivers.

"My fear is that this will simply encourage young drivers to take dangerous and illegal steps such as trying to get a parent to illegally 'front' their insurance or even attempt to drive without cover," he said.

Downing Street said Chancellor Philip Hammond would be meeting with representatives of the insurance industry to discuss the implications of the changes.

"The Government will make sure the NHS has the funding to cover any changes to hospitals' clinical negligence costs," a No 10 spokesman said.

Ms Truss, who is also Justice Secretary, said she had taken the decision in her capacity as Lord Chancellor, independent of the Government.

"The law is absolutely clear - as Lord Chancellor, I must make sure the right rate is set to compensate claimants. I am clear that this is the only legally acceptable rate I can set," she said.

Mr Farron said: "The 'just about managing' have been slapped with a further tax hike by this Government.

"Further down the track this will have huge repercussions for our public services.

"This clearly hasn't been thought through and is another Government omnishambles."

The Tory chairman of the Commons Treasury Select Committee said the move had a "look of absurdity about it".

Andrew Tyrie acknowledged Ms Truss "appears to have had little choice" under the current legal framework.

"But the result will be sharp rises in people's insurance premiums, and a big hit to the public finances," he said.

"The principle that people should receive full compensation for the losses that they have suffered is a reasonable one.

"But implementing it in this way is probably not, and has a look of absurdity about it.

"Other ways of calculating the discount rate need to be examined, including one that reflects the long-term equilibrium risk-free yield.

"This is all the more important given that the gilt markets have been heavily distorted since the financial crash, not least by emergency action to assuage its consequences, including QE.

"The Government is now consulting on how the discount rate should be set for the future. This is not before time.

"If changes to primary legislation are appropriate, controversial though they may be, the Government should consider them."

CBI director-general Carolyn Fairbairn said: " The unexpected, significant cut to the discount rate is a setback for the UK's world-leading insurance industry.

"It subjects insurance companies to a large and sudden shock at a time when stability and predictability should be prioritised.

"We support a fair framework for claimants and defendants, but the way in which the discount rate is calculated is flawed, as it is based solely on short-term market movements.

"It's important that the planned consultation happens straight away, to make sure long-term economic factors are included in the calculation of the discount rate.

"From the increasing strain of business rates to questions over the UK's future relationship with Europe, the cumulative burden of challenges is weighing on UK companies.

"Now more than ever, it is critically important that firms have a stable policy framework in which to grow, invest and drive prosperity for all parts of the UK."

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