AA blasts government over discount rate decision saying car insurance premiums would have stabilised

Oliver Gill
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Car insurance premiums edged up in the three months to March. They would have fallen if it wasn't for the government, said the AA (Source: Getty)

Insurance premiums would have flatlined in the first three months of 2017 had it not been for "astonishing" government decisions, the AA said today.

Annual car insurance costs are up to 21.6 per cent higher compared with a year ago but increased a more modest 0.9 per cent in the first quarter of 2017.

In February, justice minister Liz Truss shocked the insurance sector by cutting the discount rate, the reference to which personal injury claims are calculated, by more than expected. The move hit the profits of car insurers, with the expectation the additional cost likely to be passed onto consumers in the future.

Read more: LV reveals £139m discount rate hit to annual profits

“It has had an immediate effect on car insurance premiums because injuries already claimed for, but not yet paid, are affected by the rate change as well as new claims," said the AA's director of insurance Michael Lloyd.

It was an astonishing and unrealistic decision that didn’t take account of where claimants are most likely to save their money.

They are not going to put their money into government securities, on which the discount rate is calculated, which have a negative interest return.

Following a backlash from insurance firms, chancellor Philip Hammond moved quickly to placate firms by pledging to review the process of setting the discount rate.

Read more: The government is having another look at its insurance discount rate cut

Any changes would have needed to have been fast-tracked through legislation. But the calling of the General Election has meant any changes have now been put on ice and the discount rate will remain at the level set by Liz Truss, -0.75 per cent.

The Ministry of Justice has yet to respond to requests to comment from City A.M..

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