traffic london
A traffic jam is seen as cars head towards the approach tunnel of Heathrow Airport, west London (file picture). Reuters

Car insurance premiums in the UK are "set to soar" after a government ruling, industry experts have warned.

Young drivers could see their premiums rise by as much as £1,000 and those over 65 could see hikes as high as £300.

The increases will be a consequence of a Ministry of Justice announcement on Monday (27 February), which increased the amount of money that will be paid out to compensation claimants.

Announcing the changes to the London Stock Exchange, Justice Secretary Liz Truss said the discount rate used to calculate such payments will be changing from 2.5% to minus 0.75% as of 20 March.

It means those affected by medical negligence, car crashes and other incidents will receive a higher monthly sum, but it will increase the strain on insurance companies, the NHS and other bodies responsible for paying out claims.

In her statement, Truss warned of the "significant implications across the public and private sector" but said her actions were necessary based on returns of government bonds.

Huw Evans, director-general of the Association of British Insurers (ABI), labelled the change a "crazy decision".

"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," he said.

"We estimate 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."

Mohammad Khan, UK general insurance leader at PwC, laid out how the changes will be passed onto customers.

"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," he said.

Liz Truss
Justice Secretary Liz Truss announced the changes to the London Stock Exchange on 27 February 2017 Leon Neal/ Getty Images

"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)."

However, lawyers who had campaigned in favour of the changes welcomed the news.

"People already coping with the most severe injuries have been deprived of the help and care they need for years," said the Association of Personal Injury Lawyers.

Truss said the government will review the framework on how the future rate is set to ensure it "remains fit for purpose" and is fair for insurers and claimants.

A consultation will be brought to ministers for consideration before Easter, she added