The so-called discount rate is used to calculate lump sum payments to people who suffer serious injuries, for example following a car crash or medical negligence.

The government today cut the discount rate to -0.75% from 2.5%.

The move will increase costs for insurers by up to £3bn and could add up to £100 to the average car insurance premium, market research firm Consumer Intelligence warned.

The discount rate is used to adjust amounts awarded in major personal injury claims where victims suffering catastrophic injuries are awarded lump sums based on the return that can be earned when the money is invested. It has been set at 2.5% since 2001. The decision to cut it to -0.75% increases the amount that insurers have to pay out.

Ian Hughes, chief executive of Consumer Intelligence, said: “This is going to cause a massive jump in shopping around as this is the first year that insurers are going to have to be upfront about premium changes.

“Drivers will see their prices rising and will not be bothered about whether it is the Ministry of Justice or discount rates that are behind the premium increases.”

‘Crazy’ move

The Association of British Insurers (ABI) called today’s announcement ‘crazy’.

“Cutting the discount rate to -0.75% from 2.5% is a crazy decision by [Lord Chancellor] Liz Truss. Claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK,” said Huw Evans, ABI director general.

“We estimate that up to 36 million individual and business motor insurance policies could be affected in order to over-compensate a few thousand claimants a year.

“To make such a significant change to the rate using a broken formula is reckless in the extreme, and shows an utter disregard for the impact this will have on consumers, businesses and the wider operation of the insurance market.”

The cost of car insurance has been soaring, reaching record highs in the final three months of last year thanks to tax hikes and the rising cost of whiplash claims.

Premiums are expected to accelerate ahead of another increase to insurance premium tax in June.

“Everyone should be shopping around to at the very least limit price rises,” said Hughes.