Lord chancellor Liz Truss today announced that the discount rate applied to personal injury compensation payments will be slashed to -0.75%.

The new rate, reduced from the current 2.5%, comes into effect on 20 March. It is the first amendment to the rate since 2001.

The news will be welcomed by campaigners for personal injury claimants who stand to receive substantially more compensation.

But Truss has admitted the new rate will have a significant impact on insurers and a knock-on effect on public services with large personal injury liabilities – particularly the NHS.

The rate sets how much compensation payments should be adjusted to reflect the interest that claimants can expect to earn by investing it.

In finalising the compensation amount, courts apply a calculation called the Discount Rate – with the percentage linked in law to returns on the lowest risk investments, typically Index-Linked Gilts.

Truss said the law makes clear that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on this lump sum, often for long periods or the duration of their life.

Compensation awards using the rate should put the claimant in the same financial position had they not been injured, including loss of future earnings and care costs.

Truss added: ‘The law is absolutely clear – as lord chancellor, I must make sure the right rate is set to compensate claimants. I am clear that this is the only legally acceptable rate I can set.’

In an announcement to the London stock exchange today, the government confirmed that chancellor Philip Hammond will meet with the insurance industry to discuss how it will manage the change.

The government is committed to ensuring the NHS Litigation Authority has ‘appropriate funding’ to cover changes to hospitals’ clinical negligence costs, as well as finding to meet additional costs to GPs.

The government will open a consultation in the coming weeks to consider whether there is a better or fairer framework for claimants and defendants, with any necessary legislation to be brought forward at an early stage.

The consultation, which will be launched before Easter, will consider options for reform – including whether the rate should in future be set by an independent body; whether more frequent reviews would improve predictability and certainty for all parties; and whether the methodology is appropriate for the future.

Huw Evans, director general of the Association of British Insurers, said the decision was ‘crazy’ and warned there will ‘inevitably’ be increases in motor and liability premiums.

He added: 'Cutting the discount rate to -0.75% from 2.5% is a crazy decision by 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. We estimate that up to 36m 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.'

Defendant firm Kennedys expressed 'shock and disappointment' at the decision and warned claimants will now be over-compensated.

But the Association of Personal Injury Lawyers, which has long campaigned for a reduction in the rate, said the 'overdue' change means people who suffer severe life-changing injuries can now be assured that the compensation needed to look after them is calculated correctly and is sufficient to provide care for the rest of their lives.

'We hope this decision marks a long overdue turning point towards treating injured people fairly and with understanding,' said the organisation.

Sarah Stanton, partner at south England firm Moore Blatch, added: 'The change will make an enormous difference to claimants with life changing injuries, particularly given that interest rates have been low for several years.'