The Ministry of Justice has unveiled changes to the way insurers calculate personal injury compensation payouts using the discount rate in its Civil Liability Bill today.
The rate was reduced from 2.5% to -0.75% in February last year in the hope that payouts would more accurately reflect what claimants could expect to receive by investing their compensation.
This dramatically increased the size of awards, which is thought to be partly responsible for car insurance premiums increasing by 8% over 2017 as insurers passed on the costs to customers.
However, the government has decided the rate should be set with reference to 'low risk' investments rather than the 'very low risk' at present.
The bill also establishes a regular review of the rate, the first of which will be within 90 days of the legislation coming into force, and at least once every three years after that.
In addition, an independent expert panel chaired by the Government Actuary will be formed to advise the Lord Chancellor on the setting of the rate.
"This bill will ensure people in England and Wales receive fair compensation while reducing excess costs in the system," Association of British Insurers director general, Huw Evans, said.
"The sensible new framework proposed for the personal injury discount rate would deliver a system that is fair for customers, claimants and taxpayers."
The bill also includes measures to clampdown on the UK's "compensation culture" by setting fixed amounts for whiplash claims, and ensuring that medical evidence is provided.
The government said predatory parts of the claims industry that encourage exaggerated and fraudulent claims had been partly responsible for a 50% rise in personal injury claims over the last decade.
However, it insisted that today's proposals would result in approximately £1bn in savings for insurers, with the whiplash reforms cutting annual motor insurance premiums by an average of £35.
Justice Secretary, David Gauke, said: "The number of whiplash claims has been too high for too long, and is symptomatic of a wider compensation culture.
"We are putting this right through this important legislation, ensuring whiplash claims are no longer an easy payday and that money can be put back in the pockets of millions of law-abiding motorists."
