Insurers could save as much as £2.5bn if the government’s calculations for the personal injury discount rate come to fruition, according to accountants. 

The Ministry of Justice yesterday revealed that it will legislate to change the formula for calculating deductions from personal injury awards. The rate will be set by reference to rates of return on ‘low risk’ investments rather than ’very low risk’ as at present. Based on the government’s working, if the new system were to be applied today, the rate would be in the region of 0% to 1%.

The decision was welcomed by key figures in the insurance industry, and examination of the potential effects by big four accountancy EY explains why. Tony Sault, UK general insurance leader for EY, said the insurance industry had been facing £6.5bn losses from the present rate of -0.75%, which would add 6.5% to motor premiums.

‘We believe the new proposals, which the government expects to imply a real rate of 0% to 1%, will have a significant impact on these costs,’ he said. ‘A revision to 0% could reduce these costs by one-third meaning reserve releases of £1.2bn, while a change to 1% could reduce this by two thirds, meaning up to £2.5bn could be saved by insurers and reinsurers compared to their current booked position.’

Sault predicted that rises in insurance costs would now level out and premiums could fall by between 2% and 4%, with consumers saving £21 on average.

However, the insurance industry has been reluctant to make any specific promises about whether premiums will come down once the legislation is passed.

Huw Evans, director general of the Association of British Insurers, said the change will ‘relieve some of the cost pressures on motor and liability insurance in a way that can only benefit customers’.

Colin Holmes, chief executive of Aviva’s UK general insurance business, said any measures which reduce the rising costs of insurance ‘will directly feed through to premiums’.

Flora Hamilton, head of financial services for the Confederation of British Industry, added: ‘These proposals will be welcome news for the UK’s world-leading insurance industry.’