The cost of motor insurance could see a substantial drop next year as a key rate which helps set injury compensation payouts is changing.
The personal injury discount rate (PIDR) is used to help calculate how much defendants have to pay in damages to claimants and takes into account the potential returns that victims could expect to receive from their money over time from investing the cash.
When victims of life-changing injuries accept lump sum compensation, the rate is applied when calculating the payout.
From 11 January 2025, a new discount rate of 0.5 per cent will come into force, following improvements to the investment landscape after a previous rate of -0.25 per cent.
The move to a positive discount rate could help to ease some cost pressures on insurers - such as those providing motor cover - although rising cost pressures such as labour and raw materials remain.
Analysis from accounting firm PwC has estimated premiums could decrease by an average of £50, with the rate change encouraging competition.
Mohammad Khan, head of general insurance at PwC UK, said: “This change is good news for drivers as it will further intensify the competitiveness of the motor insurance market.
“Motor insurance premiums have risen by over 20 per cent over the last two years but the direction of travel has been turning and these amounts are starting to reduce.”
The change will come as a welcome development for motorists, who forked out an average of £612 for insurance between July and September this year.
Announcing the new rate, the government’s lord chancellor Shabana Mahmood said: “I have paid careful regard to the need to avoid significant under-compensation for claimants, while simultaneously aiming to minimise excessive over-compensation.
“Achieving the appropriate balance between these aims across all claimants is an extremely complex and difficult exercise, and one in which the expert analyses of the consultees to the review have been invaluable.
“It is very important to recognise that the personal injury discount rate will always be a relatively blunt instrument, since no one choice of rate can ever ensure that all claimants receive exactly their full compensation.”
The PIDR in England and Wales is reviewed every five years.
