The cost of motor insurance is being driven up by personal injury payouts that are dramatically higher than the rest of Europe
Personal injury payouts in the UK are seventeen times higher than in some other European countries, and are forcing up the cost of insurance for drivers, according to a study by the RAC Foundation.
Meeting the long-term care costs of some of those catastrophically injured in road accidents can result in compensation payments of around £10m in the UK, ahead of £6m in both Germany and France, the RAC found. In Sweden, compensation might be as little as £0.6m, it said.
The largest factor in the size of a claim is what proportion of the medical and care costs are met by the state, and how much is the responsibility of the injured party – and hence their insurer, according to the study conducted by Nick Starling, former director of general insurance at the ABI.
The study argued that the national differences in levels of compensation are likely to increase following the government’s decision to cut the discount rate from 2.5% to minus 0.75%.
That is likely to result in insurers having to pay much larger up-front lump sums to fund ongoing care for those most badly hurt on the roads. The report said.
“The UK Government’s own calculations for a young quadriplegic requiring £100,000 a year in care costs is that the lump sum award will increase from £5m-£6m to £9m – up around 60%.,” the study said, pointing out that the PRA has estimated that overall claims costs could rise by £2bn annually.
“The biggest burden of the change is likely to be felt by young drivers in terms of increased premiums, because they already pay the highest amount for cover,” the report said.
The report highlighted other reasons UK motor premiums are higher than elsewhere in Europe.
Some countries like France limit annual premium increases; UK insurers focus on the age of drivers rather than the type of car; 17-year olds can drive in the UK, while on much of the continent the minimum driving age is 18.
While the report identifies the UK as having high initial premiums for young drivers, it says these can fall rapidly through the system of no-claim discounts. Also, increasingly-common telematics-based insurance offers more affordable cover to young people.
The study says that, overall, the UK has one of the most competitive insurance markets in Europe. An estimated 70% of policies are bought online, predominantly through price-comparison websites.
“The nation’s 38 million drivers are all too well aware of the high cost of insurance, and while direct comparisons with the rest of Europe are hard to make all the signs are that we pay more for our insurance than our continental cousins,” said Steve Gooding, director of the RAC Foundation.
“One reason is the high pay outs insurers must make when people are badly hurt on the roads. Another is recent hikes in insurance premium tax which now stands at 12%, hitting young drivers particularly hard as they are already paying high premiums.
“The report also points to the culture of whiplash claims as a UK phenomenon, driven by claim handling companies.”
ABI Director General Huw Evans, said: “It’s vital that people who suffer catastrophic injuries get the compensation they need, but these payments also need to be fair on customers and taxpayers who pick up the bill. It can’t be right that the UK has the lowest discount rate of any major economy in the world, and this study shows what that means for customers. The absurd decision to cut the discount rate so dramatically will also cost the NHS over £1bn a year.
“With inflation on the rise, motor premiums at a record high and the public purse under pressure, it is critical that the Government moves swiftly to make the changes needed to deliver a fairer personal injury discount rate”