Philip Hammond has ordered an urgent review of an insurance overhaul that would mean millions of drivers paying more for their policy.
In a surprise move last night, the chancellor said that he would be holding a consultation on personal injury claim payouts after warnings that a rule change announced this week would affect drivers, businesses and the NHS.
Liz Truss, the justice secretary, faced an immediate backlash on Monday after announcing that she would be adjusting the “discount rate” on personal injury claims, meaning that insurers would have to pay out more.
Taking the industry by surprise, she announced that she would reduce the figure from 2.5 per cent to minus 0.75 per cent on March 20. The move was described as “crazy” by major insurers, who said that it would cost them and drivers — to whom the cost would be passed on — millions to cover. The chancellor’s announcement is a sign that the government is attempting to remove policy problems before Brexit. However, the Treasury made it clear that the proposed cut would go ahead.
Mr Hammond’s intervention came after an emergency meeting with senior figures from the insurance industry. The Association of British Insurers has estimated that motor insurance premiums could be increased for as many as 36 million individuals and businesses as a result of the changes, with young drivers facing an increase of up to £1,000.
Compensation in the most serious personal injury cases is set to double after the adjustment. However, it has also been predicted that taxpayers and the NHS could have to find another £1 billion to deal with medical negligence claims. Meanwhile, drivers will have an average of £50 to £75 added to their insurance after the change.
When victims of major accidents accept lump-sum payouts, the amount that they receive is cut to take account of the interest that they can expect to gain from investing their money. The government has opted to slash the discount rate as returns on investments are low at present.
Baroness Altmann, the former pensions minister, criticised the move. “This seems unreasonable and economically unsound. It is wholly misguided for long-term insurance settlements to be based on negative interest rates. The idea that interest rates will remain negative in the long term is unthinkable,” she told the Daily Mail.
“This will add to the cost of insurance claims and will sharply increase premiums for ordinary households and small businesses already under pressure.”
Ms Truss said on Monday that the figure was the only “legally acceptable” rate she could set. She promised funding for the health service to cover higher payouts.