Industry experts claim that car insurance premiums are set to rise by £75 a year, following a recent government ruling.
The Ministry of Justice have announced a new formula for that will be used to calculate compensation for people who suffer long-term injuries.
However, the decision has been labelled “crazy” by the Association of British Insurers (ABI).
In response to the criticism, the Ministry of Justice have said that consultations would be made before changes are implemented, and have stated that they had no choice due to the state of the current legislation.
Almost immediately after the announcement, insurance companies’ shares fell, with some speculating that profits would be lowered by millions of pounds.
The change is expected to take effect from 20 March 2017. Under the current system, victims of long-term injuries are paid a compensatory lump sum, which is intended to last until death.
However, should this lump sum be invested, it can be increased; as such, in order to remain fair to insurance companies, the pay-out will be reduced.
Since 2001, the discount rate has been set at 2.5 per cent, meaning that insurance companies would have to pay less money, while still ensuring that victims received enough.
Now though, the Ministry of Justice has seen fit to change the rate from 2.5 per cent to minus 0.75 per cent.
The change came about due to the lowering of interest rates, meaning that victims are now losing out on money that they would have received when the policy first began.
Huw Evans, director-general of the ABI, has said: “claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK.
“We estimate that up to 36 million individual and business motor insurance policies could be affected in order to over-compensate a few thousand claimants a year.”
The price rise is expected to hit young drivers the hardest, with drivers under the age of 22 expected to pay an extra £1,000 a year.
“We anticipate an increase of £50-£75 on an average comprehensive motor insurance policy, with higher increases for younger and older drivers – potentially up to £1,000 for younger drivers, and a rise of up to £300 for older drivers,” said Mohammad Khan, UK general insurance leader at accountancy firm PwC.
Multiple insurance companies have already said that expected their finances to be negatively impacted as a result of the changes.
Direct Line, for example, have said they expect their earnings to fall by as much as £230m.
The Ministry of Justice will conduct a series of investigations to see how the system could be made fairer going forward. They do, however, remain adamant that the change was necessary.
“The law is absolutely clear – as Lord Chancellor, I must make sure the right rate is set to compensate claimants,” said Liz Truss, the Lord Chancellor and Justice Secretary.
“I am clear that this is the only legally acceptable rate I can set.”