Young drivers could see their car insurance premiums rise by up to £1,000 as changes to the way personal injury compensation is calculated are introduced.
Passing your driving test and getting hold of the keys is a major milestone in many young peoples lives. Another of life’s firsts that usually comes along with it is the arrival of the first insurance bill – which is often a dose of reality for the young driver!
Premiums for young drivers have always been among the highest, as they are deemed a higher risk than older, more experienced drivers with a few years of no claims under their belts, and the costs of insuring their first cars are expected to get even higher for young drivers.
Changes in how personal injury compensation payouts are calculates were recently announced by the government, and industry experts expect them to affect the cost of car insurance premiums for all drivers. However, drivers aged under 25 are thought to be in line for the biggest financial hit.
The result of the compensation changes will likely see the average driver suffer premium increased of around £50 – £75 per year on their fully comprehensive policy. Young drivers, by contrast, could see their car insurance premiums rise by as much as £1,000 – meaning the average cost of a young drivers insurance policy could be over £2,000 in total.
What changes are being made to how victims are compensated?
The latest increase in car insurance premiums is being predicted because earlier this month the UK government announced significant changes to how compensation payouts to people who suffer injuries after road traffic accidents are calculated.
When an injury victim receives a compensation payout, the actual amount is reduced in line with the amount of interest they could earn by investing the lump sum – which is known as the discount rate. For the last 16 years the discount rate has been set as 2.5%, however the government has now changed this to -o.75% – which means the injured party will receive more money from insurance companies.
As is always the way, if insurance companies have to pay out more those extra expenses will get passed on to the consumer in the form of higher premium costs. These are expected to disproportionately affect younger drivers as they are mostly responsible for the more serious accidents that result in injuries and therefore higher compensation payouts.
Mohammad Khan, the UK general insurance leader at accountancy firm PwC said:
“Unfortunately, young drivers are responsible for most of those accidents – drivers aged under 25 cause 85% of the serious injury accidents. They disproportionately affect those serious injury claims.
“Those claims have now shot up in value. From a pricing perspective, the people more likely to cause those accidents will have far greater premiums.”
More bad news for young drivers
The news of yet more increases in the cost of insurance for young drivers comes as comparison website CompareTheMarket.com released a report suggesting the overall cost of running a car is up to £2,400 per year after insurance, road tax, fuel and other costs are considered.
Speaking about the effect on young drivers, Simon McCulloch from CompareTheMarket said:
“They have less disposable income with which to weather these storms, so we are quite worried about the effect of young drivers trying to stay mobile.
“They have got a little bit less money relative to generations before them, they have got higher fuel costs, they have got more expensive insurance and it does feel like it is a little bit harder.”
For their part, The Association of British Insurers (ABI) has described the change to the discount rate as a “crazy decision” and agrees with the estimates of potential four-figure increases. The ABI’s Matt Cullen said:
“Lots of young drivers rely on their cars – whether to get to school or university or college or work – and it is very important that we have an environment which does not encourage practices that are unhelpful or in some cases illegal, such as fronting, where the parent buys the insurance and has the young person as the second driver when it is actually just the young driver driving. Or driving uninsured, in the worst cases.”