Compensation 'discount rate' reviewed after furore over cost to drivers and NHS
Ministers have unveiled a shake-up of the measure used to determine personal injury payouts after a backlash over surging costs for motorists and the NHS.
The Government set out proposed reforms to a formula known as the discount rate, which is applied to financial awards given to victims of medical negligence, car crashes and other incidents.
The rate is a percentage used to adjust compensation totals given to those who suffer serious personal injury, according to the amount they can expect to earn by investing the money.
Claimants must be treated as risk-averse investors who are financially dependent on the lump sum, often for long periods or the duration of their life.
Awards using the rate should put them in the same financial position had they not been injured, taking into account loss of future earnings and care costs.
The system was at the centre of a furore earlier this year when it was announced that the rate would fall from 2.5% to minus 0.75%.
Officials insisted that this was the only "legally acceptable" course of action but the decision was greeted with disbelief by the insurance industry, which described the changes as "crazy" and "reckless in the extreme".
Millions of motorists were warned to brace for increased premiums, while the Government has set aside an extra £1.2 billion a year to meet the expected additional costs to the public sector, with the NHS in particular facing a rise in its bill for settling medical negligence claims.
Ministers launched a consultation in March and the Ministry of Justice (MoJ) said analysis of the feedback, along with other research, has indicated that claimants often take more investment risk than the law currently assumes.
The changes announced on Thursday would mean the rate would be set by reference to "low risk" rather than "very low risk" investments as at present.
It is estimated that, based on currently available information, if the new system were to be applied today the rate might be in the region of 0% to 1%.
The MoJ said the move will help ensure that claimants continue to receive full compensation, but significantly reduce overpayment by more reliably reflecting how the money is actually invested.
Huw Evans, director-general of the Association of British Insurers, said: "This is a welcome reform proposal to deliver a personal injury discount rate that is fairer for claimants, customers and taxpayers alike."
Martin Dyson, head of RAC Insurance, said: "This is good news for motorists as the price of car insurance has risen by around 10% in the last year with the Government's change to the discount rate being a significant factor.
"This led to insurers having to make larger compensation payments which in turn the industry then had to fund in the only way it could by increasing premiums."
Lord Chancellor and Justice Secretary David Lidington said: "We want to introduce a new framework based on how claimants actually invest, as well as making sure the rate is reviewed fairly and regularly."
The rate would also be more regularly reviewed - at least every three years - under the plans to be brought forward in draft legislation. Prior to the adjustment earlier this year, the rate had been unchanged since 2001.
Shadow Justice Secretary Richard Burgon said the proposals must be scrutinised very closely.
He added: "Accident victims with serious injuries must receive the compensation they deserve to live their lives to the fullest and there will be real concerns that such victims are set to lose out."