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Is your car insurance about to get cheaper?
UK drivers could see the cost of their insurance premiums drop from August, following a change in the way compensation for personal injury is calculated.
Last week, the Lord Chancellor increased the Discount Rate - which determines how much insurers pay for personal injury claims - from -0.75% to -0.25%. This will take effect from 5 August 2019.
As the rate has gone up, payouts are likely to go down and these cost savings may be passed on to customers.
Here, we take a look at how the new Discount Rate could affect your car insurance premium.
What is the Discount Rate?
The Discount Rate, also referred to as the Ogden Rate, is used by the courts to decide how much compensation should be paid for personal injury claims.
The courts assume claimants will invest the lump sum payment and earn a return from it. This rate of return is then deducted from the amount the insurer is ordered to pay.
However, since March 2017, the Discount Rate has been in the negatives - meaning insurers have to add to the lump sum, to account for the money losing value over time.
How will the Discount Rate affect premiums?
After the government dropped the Discount Rate from 2.5% to -0.75% in March 2017, there was a sharp rise in the amount of compensation that insurers had to pay.
Initially, this caused a spike in the cost of car insurance prices, as insurers pushed the increased costs to their customers. However, as the market began to recover from the shock, car insurance premiums levelled out again.
As the Discount Rate rate has now risen again, the costs to insurers will fall, and it's likely that premiums will fall in turn.
That said, insurers may have expected a bigger increase, with estimates at somewhere between 0 and 1%.
Some industry experts fear that the government's decision to only increase the Discount Rate to -0.25% could see car insurance premiums rise again.
A spokesperson from the Association of British Insurers (ABI) said: 'The new Discount Rate is a bad outcome for insurance customers and taxpayers that will add costs rather than save customers' money. It will put further pressure on premiums.'
Find out more:15 ways to get cheap car insurance
Other factors influencing car insurance
The Discount Rate isn't the only thing that influences the cost of car insurance.
Insurance Premium Tax (IPT) is tax levied on companies by the government, which is factored into the price that you pay for cover.
This means that if the cost of IPT increases, so will the cost of your car insurance.
There are two types of IPT:
- Standard rate IPT, which applies to general insurance policies like car insurance, home insurance and pet insurance.
- Higher rate, which applies to travel insurance, mechanical insurance and electrical appliances insurance.
IPT has been around for decades, but since October 2015, the standard rate has risen four times and has doubled from 6% to 12%. This caused car insurance premiums to increase as a result.
The table below shows historical rates of IPT.
| Rates | From 1 Jun 2017 | 1 Oct 2016 to 31 May 2017 | 1 Nov 2015 to 30 Sep 2016 | 4 Jan 2011 to 31 Oct 2015 | Up to 3 Jan 2011 |
| Standard rate | 12% | 10% | 8.5% | 6% | 5% |
| Higher rate | 20% | 20% | 20% | 20% | 17.5% |
Research has found that from 2015 to 2018, changes to IPT and the Discount Rate have added an extra £208 to the average cost of car insurance.
- Find out more: best and worst car insurance
Civil Liability Act changes
In 2018 the government passed the Civil Liability Act, which significantly brought significant changes to claims for whiplash.
Under the new rules, the definition of whiplash has been tightened and injuries lasting up to two years will be compensated under a set tariff. This is expected to decrease the amount paid out by insurance companies.
The Ministry of Justice (MoJ) has said that the changes aim to make claims for personal injury fairer, so while people who are injured receive 'full and fair compensation', insurers are spared the 'pressure of meeting excessive compensation' claims.
Despite these changes not coming into effect until April 2020, some insurers have started to pass the anticipated lower costs on to drivers. Which? reported in April this year, that since the Civil Liability Act was passed, premiums fell from £790 in December 2018 to £690 in February 2019.
Although this could signal a decrease in car insurance premiums over the long term, there were other factors at play over that period.
During this time, there was a decline in the number of registrations, which may have forced car insurers to make their pricing more competitive in a shrinking market. In December 2018, for example, the number of car registrations fell 5.5% year on year.
How to find the best car insurance
When you're looking for a new car insurance policy, make sure you shop around.
We've combined expert analysis of more than 30 standard car insurance policies along with feedback from thousands of policyholders to produce independent car insurance reviews.
You can also find out handy tips and tricks for reducing your premium in 15 ways to get cheap car insurance.
For more tips and information, check out our car insurance advice guide.
