The average price for a comprehensive car insurance policy could increase by up to £75 a year because of a government ruling, according to industry experts.

The Ministry of Justice has announced a new formula for calculating compensation payments for those who suffer long-term injuries due to a car crash, medical negligence or other types of incidents.

Changes to the way lump sum payouts are calculated mean that people affected in such incidents will get more money. That’s because the discount rate used to calculate how much compensation is paid in severe personal injury claims is to be lowered from 2.5 per cent to minus 0.75 per cent.

However, experts in the insurance industry have slammed the move, including the Association of British Insurers which calls the decision “crazy” and “reckless in the extreme”. Motorists are now being warned they could end up paying much costlier car insurance premiums in the future. Young motorists could be hit especially hard.

The UK general insurance leader at PwC, Mohammad Khan, said: “As a direct result of this change, we anticipate an increase of £50-£75 on an average comprehensive motor insurance policy, with higher increases for younger and older drivers – potentially up to £1,000 for younger drivers (18-22 year olds) and a rise of up to £300 for older drivers (over 65 years old).”

Khan added: “Due to the competitive nature of the insurance industry, policyholders should be able to reduce any impact by shopping around but younger and older drivers will see significant price increases regardless.

“The announcement will also impact reinsurance pricing by pushing prices up for motor and liability reinsurance cover.”

Liz Truss, who is the current Justice Secretary, but made the decision on insurance payouts in her capacity as independent Lord Chancellor, said: “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.”

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