Car Insurance Costs to Soar! Maybe. More Likely Maybe Not!

A fairly uninteresting formula used to calculate personal injury compensation has suddenly become a very interesting formula used to calculate personal injury compensation. This is because the government has noticed that the returns on investments are low. Fingers on the pulse as usual given that the last time this formula was altered was 2001, so why now? Returns on Index Linked Gilts have not been great for a long time, yet the 2.5% used in this formula has been a constant for over 15 years!

The formula is important as it fixes the amount of compensation from an insurance company to a personal injury claimant who is deemed to need the money in order to ease their wellbeing following life changing injuries. It is used to calculate the lump sum amount required to meet the claimants ongoing needs, while taking into account the expected investment return on that lump sum. Since 2001 this figure has been 2.5%, it is now minus (yes, minus!) 0.75%. It is in effect stating that to get what is needed from that lump sum, it has now got to be large enough to withstand an annual drop in value of 0.75%

In one of the few articles I have read that gives some actually thought out figures, the Solicitors Journal  states:

‘For someone in their twenties, lump sum damages would change from £4.8m to £11m. For someone in their sixties, where it impacts less, lump sum damages would change from £3.8m to £6.5m.’

And here I start to feel deflated and reach for yet another calming dose of Earl Grey. With the best will in the world, I think the good folks at the Solicitors Journal would accept that they do not enjoy the mass readership of the great general public. Neither does the many specialist publications who have covered this in a bit of informed detail. A very necessary bit of informed detail. Instead, the mainstream press goes straight to the eye catching “Car Insurance to rise by £300” headlines which are advertiser friendly and get people who are expert at reading these headlines much ego massaging time on the radio.

Yesterday, I was accosted by an acquaintance who’s knowledge of finance and insurance extends to the fact that he has a mortgage and three children, no life insurance but a great deal on his iphone cover, and was told that his nephew is now going to have to pay £1000 more for his car insurance because “The government have put car insurance up for the under 25’s”. Despite my best efforts, he is sticking to his dystopian view because “that guy on the radio said it”

Do the mass media really get off on scaring people?

I have read the “£1000 increase” for under 22’s in many places, along with “£400 increases” for older drivers and “£75 – £100” increases for the inbetweenies. Not once have I seen anything that tells me how the dickens these figures are derived. The ancient art of plucking figures from the air is in vogue yet again. Fact is that car insurance premiums are calculated in many ways. The figure you end up with on your renewal depends on where you live, your age, your job, the car, your own driving history and even the fact that the underwriter has been told that he must get in x amount of policies so “be friendly on the discounts this week.”

The art of acquiring financial figures to be used in newspaper headlines is ancient and has to be passed down from master to student…


The most recent things I have read about this change is that the government want to have meetings with the insurance industry to see if there is a “way forward”. I strongly suspect that such a “way forward” was considered long before this change was announced. If you want to dump an idea, first change it for the worse then wait for those effected to come up with their own “not quite as worse, but worserer than they would have originally demanded” plan.

The idea that someone in receipt of a large sum of money is going to use it in a way that reflects the government’s view regarding the investment of said money, and therefore the formula used to calculate it is so far from reality that it is laughable. The fact that it has been looked at now seems to me that it is more likely that they will ditch the whole idea on which this calculation is made and come up with a whole new way of dealing with this situation.

And as for car insurance premiums, I wouldn’t put my kidney on ebay just yet. Natural market forces, along with a whole lot of other things, will temper things down to just expensive rather than impossibly expensive.

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