MOTORISTS in Scotland face a rise in average car insurance premiums of up to £75 a year as a result of a "crazy" government reform which increases payouts for personal injury victims, industry experts have said.

The Association of British Insurers (ABI) said the change announced by the Ministry of Justice was "reckless in the extreme" and affect 36 million motor insurance policies in Britain as well as landing the NHS with a £1 billion rise in its negligence claim compensation bill.

The NHS Litigation Authority will be compensated for any extra cost, the government promised.

The Ministry of Justice announced that it will cut the discount rate – a calculation used to determine lump sum compensation to claimants who have suffered life-changing injuries - to minus 0.75 per cent from 2.5 per cent - much bigger cut than the industry expected.

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The Ministry of Justice said it had no choice under the current law, and said it would consult on possible changes.

But it is due to take effect from March 20, marking the first time it has been changed since 2001.

Shares in insurance companies fell, with some saying that profits would be hit by millions of pounds.

Scots who pat they least on average for car insurance of motorists anywhere in the UK, will expect to pay between £50 and £75 extra in annual premiums, according to accountants PwC, with hikes of up to £1,000 for younger Scots drivers aged 18 to 22 and £300 for motorists aged over 65.

Huw Evans, director general of the Association of British Insurers, which represents the insurance industry, called the move a “crazy decision” warning: “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."

The Herald:

The ABI expects 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,” Mr Evans added.

Mohammad Khan, UK general insurance leader at PwC, said:"Unfortunately, this announcement will have a significant adverse impact on motor insurance prices that drivers pay and also commercial insurance rates paid by small businesses."

And Simon McCulloch, director of insurance comparison website comparethemarket.com, said the rate change was "drastic".

The discount change welcomed by personal injury lawyers, centres on the way courts award lump sum payments to people suffering personal injuries.

Until now it was thought victims of life-changing injuries receiving payouts would be able to invest the money and earn a rate of return, so a chunk could be cut from the total.

That discount rate was cut because the rate people are able to earn from low-risk investments has fallen sharply.

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The compensation award using the rate is meant to put the claimant in the same financial position had they not been injured, including loss of future earnings and care costs.

The announcement has forced many listed insurers to make unscheduled announcements to the London Stock Exchange, with many having to delay reporting their financial results as they take stock of the hit they will take.

Admiral Group expects it will cost an extra £140m to £175m to settle all current claims as a result of the change. This will drain £70m to £100m from its 2016 profits. Shares in the company fell by three per cent Shares in eSure slumped by the same amount as it said the new discount rate would wipe £1m from its profits this year.

Direct Line said it expected its pre-tax profits to be reduced by as much as £230m.

The Ministry of Justice will now launch a consultation on how the system can be made fairer.

It said it would bring forward any necessary legislation "at an early stage".

In the meantime, it has made it clear it had no choice but to change the discount rate, according to the existing law.

"The law is absolutely clear - as Lord Chancellor, I must make sure the right rate is set to compensate claimants," said Liz Truss, the Lord Chancellor and Justice Secretary.

"I am clear that this is the only legally acceptable rate I can set."

According to research carried out last year by insurance market experts Consumer Intelligence, drivers north of the Border pay on average £562 to insure their vehicles.

This compares to their compatriots in the North West of England and London who spend as much as 50 per cent more than the national average of £1,177.

Younger motorists are paying an average £1,831 - although prices for under-25s are rising more slowly at 9.4 per cent.

Meanwhile, the over-50s are seeing annual increases of 15.3 per cent although their bills are just £348.