Jim Armitage: We all have an interest in fair deal on insurance compo

Few government policies on business have hit the public more rapidly in the pocket than the decision to force insurers to pay millions of pounds more to injury claimants.

Compensation payments to injury victims are based on a formula known as the Ogden tables, which takes into consideration what claimants can expect to earn in interest on the lump sum for the rest of their lives.

Out of a clear blue sky in February, the government declared the interest rate used to calculate that figure should be cut from 2.5% to minus 0.75%. Compensation pots must be increased to make up the difference.

And that difference is huge. Zurich today says the new calculation has cost it £222 million in bigger settlements over the first half of the year. Ageas put it at 31 million yesterday; RSA was hit for £42 million.

The idea of the new rate was to counter the effect on injury victims’ finances of low interest rates. I get that; but to suggest these poor folks are only going to be averaging minus 0.75% returns is absurd. Even Standard Life’s Gars fund can expect to do better.

Understandably, the industry has howled in protest. The government was meant to have made its formal response a few days back. So far, silence.

Ministers must sweeten the Ogden pill with a halfway house that’s fair to claimants and insurers. The minus 0.75% figure is based on returns from government index-linked bonds, but nobody in reality just invests in those. Why not come up with a blend of low-risk assets as a benchmark? An independent committee could be set up to ensure neither side feels they’re getting fleeced.

The general public may not shed tears to see insurers’ profits taking a hit. But these extra costs are being passed on to all drivers, who have seen car insurance premiums surge an average £100 per policy in the past four months. In fact, car insurance has never been more expensive.

With inflation on the up and wages flat, that’s the last thing hard-pressed families need.

Insurance folk love to extrapolate. It’s a side-effect of all those years at actuary school.

One, incensed by Westminster’s actions over Ogden, did some number crunching on what it would mean for the UK’s liability to public-sector pensions if they too were calculated using Ogden’s minus 0.75% returns.

The public accounts on state pensions assume a 1.3% real rate of interest, which makes the total 65-year liability £1.49 trillion. Drop the rate to Ogden levels and it almost doubles to £2.8 trillion, around 73% of GDP.

Fancy putting that in the Autumn Budget, chancellor?