New legislation tipped to lead to soaring car insurance premiums comes into effect today.
The change in law will increase the amount awarded in compensation to victims of serious personal injury, after incidents such as a car accident or medical negligence. This will hit the profits of insurers, who are likely to drive up prices as a result.
Here, we explain the changes being made and what you can do to keep premiums down.
Find out more: best and worst car insurance – more than 30 insurers rated
The discount rate
Courts use a formula to calculate the amount claimants are eligible for, which among other things, takes into account how much they would be likely to earn from the lump sum received if they invested it.
Since 2001, a 2.5% discount was applied to the compensation, but this how now been revised to -0.75%, meaning claimants will be awarded a higher sum.
Consequently, those insured against having to pay this compensation – such as drivers – are expected to see their premiums rise.
How much will premiums increase by?
Earlier this month, the Office of Budget Responsibility predicted that insurance premiums would be likely to rise by 10% on average this year.
Meanwhile, PricewaterhouseCoopers estimated the average driver with a comprehensive motor insurance policy would face a hit of between £50-£75, while 18 to 22-year-olds would face a hike closer to £1,000 and over-65s could fork out an additional £300.
Who has raised premiums?
A number of major insurers have reported that the law change will have a drastic impact on their profits.
Hastings Direct and Admiral had already publicly raised prices in anticipation of the discount rate change. Other companies will likely follow suit if they haven’t already made unannounced increases.
Four tips to keep car insurance premiums down
The discount rate change isn’t alone in hitting premiums this year. Insurance Premium Tax (IPT) is set to rise from 10% to 12% in June, bumping rates up further.
Fortunately, you can avoid the worst of the increases by following these four tips.
For more pointers, see our guide on finding cheap car insurance.
1. Use comparison sites to get quick quotes
When your next renewal letter arrives, shop around to see if your insurer is offering you the best available deal. Finding this out can be as straightforward as running a few quotes on price comparison sites.
It will take time to properly compare policies for their cover, but this will give a good indication as to whether your current insurer is offering a competitive premium.
When we surveyed 4,000 insurance customers in November, 79% of those who’d disputed the price offered to them managed to secure a better deal, saving themselves an average of £64.
So, if your £600 car insurance premium rises by £60 (10%) as a result of the discount rate change, arguing your case could undo the damage.
If you don’t know how to haggle, our handy guide can help you through.
3. Pay for your cover annually
Interest rates for paying monthly can be as high as 44% – which can significantly add to what you’re charged overall. Depending on your insurer, paying your premium upfront could potentially save you hundreds of pounds.
4. Don’t wait too long to shop around
With some insurers, the length of time between obtaining your quote and the date your policy starts can have a real bearing on the price offered.
In one case, Which? found a quote for a policy due to begin that day was more than twice as expensive as the same policy deferred to begin two days later.
The differences won’t always be this dramatic – but shopping around for insurance in advance can sometimes pay off.