INSURERS have warned consumers will face higher costs after the UK Government made changes to the personal injury compensation scheme they said did not go far enough.

The Lord Chancellor David Gauke yesterday announced a cut in the Personal Injury Discount Rate (PIDR) which is used to calculate lump sum payments made to people who have suffered life-changing injuries, from -0.75 per cent to -0.25%.

The change followed campaigning by insurers who argued the move to a negative rate in 2017 had helped drive motor insurance premiums to record levels.

Read more: Direct Line announces 30 per cent profits slump after changes to personal injury claims

The change in the rate would only apply in Scotland if the Scottish Government decided to follow the lead set by the Lord Chancellor.

However, it will affect a range of insurance firms that are big employers in Scotland.

Also known as the Ogden Rate, the PIDR adjusts lump sum payments for the returns the government expects recipients will generate on the money they receive.

The higher the rate the lower the lump sum payment required to ensure recipients get what is regarded as fair compensation.

The UK Government said the -0.75% rate had led to concerns that claimants were being substantially over-compensated, “increasing financial pressure on public services that have large personal injury liabilities, particularly the NHS”.

Read more: NHS in Scotland faces massive annual damages bill increase after change to injury payouts

Shares in prominent insurance firms fell yesterday when the Association of British Insurers said the change announced was a bad outcome for insurance customers and taxpayers. It said the change would add costs rather than save customers money.

“A negative rate maintains the fiction that a claimant and their representatives will knowingly choose to invest their damages in a way that would guarantee losing them money,” said director general Huw Evans.

Insurance heavyweight LV said: “[The] announcement whist replacing the absurd and fiscally irresponsible decision to cut ... doesn’t in our view go far enough.”

Sector watchers said insurers had expected the Government to approve a more favourable rate change, meaning motorists would probably be in line for higher bills.

Read more: Aviva axing 1,800 jobs as new boss plans to cut costs

“Motor insurance premiums - which have been broadly stable this year and slightly lower than last year - will probably increase,” said Mohammad Khan, General Insurance Leader and partner at accountancy giant PwC.He predicted the average motor insurance premium will probably increase by between £15 and £25. Younger drivers may see premiums increase by about £50 to £75.

The Government launched a review of the rate in September after its decision to cut the rate from 2.5% to -0.75 per cent from March 2017 caused uproar among insurers and consumers.Plummeting interest rates since the 2.5% PIDR was set in 2001 cut the amount claimants could earn when investing their compensation in low-risk assets.

The setting of the discount rate is a devolved matter. The rate is -0.75% in Scotland.

Andrew Winton, of law firm Shepherd and Wedderburn said: “The expectation was that the rate would change to 0%-1%. Against that expectation it is probably unlikely the Scottish Government will leave the rate out at -0.75%.”

He said leaving the rate at -0.75% would lead to higher personal injury awards for relevant injuries in Scotland than an equivalent case in England. “In that scenario you could see why insurance firms may charge Scottish businesses higher premiums,” added Mr Winton.

Bruce Craig, a partner in law firm Pinsent Masons, said: “Differences in damages can result in “forum shopping” where a claimant seeks to obtain jurisdiction in a court where higher damages are payable.”

He said the rate change announced by the Lord Chancellor was another factor insurers would need to take into consideration when dealing with claims.

Insurance giant Aviva has bases in Bishopbriggs and Perth. Direct Line and esure have offices in Glasgow.

Shares in Direct Line closed down 2.4p at 334.1p.