A change to the way personal injury payments are calculated means car insurance policies are going to cost more in future.

Insurers say the changes will add around £75 to the average annual policy, with older drivers facing hikes of up to £300.

It comes at a time when motorists are already paying record-high premiums and is particularly galling given that, just last week, motorists were told to expect cheaper premiums as a result of a planned crackdown on fraudulent whiplash claims.

Let's look at why the government has made this change – and why motorists should consider locking into a new insurance deal as soon as possible.

What has happened?

It all relates to the Discount Rate, which is a formula used to calculate how much compensation is owed to someone who suffers a permanent injury.

It's applied to lump sum payments and effectively allows insurers to reduce the size of the payout by making assumptions about what the money could be worth if they invested it.

Crucially, the formula is based on gilt yields, or the rate of return on government bonds. Once inflation is taken into account, current real returns fall into negative territory.

As a result, the Ministry of Justice (MoJ) has announced the Discount Rate will fall from 2.5% to minus 0.75% on 20 March 2017.

This means certain injury victims will receive far greater payouts.

A "crazy" decision

While the industry had expected a reduction to the Discount Rate, the size of the change has taken many by surprise.

Huw Evans, Director General of the Association of British Insurers, described it as 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.”

For its part, the MoJ stressed that it had no choice but to make the cut under current law.

Liz Truss, Lord Chancellor and Justice Secretary, said: “The law is absolutely clear – as Lord Chancellor, I must make sure the right rate is set to compensate claimants. I am clear this is the only legally acceptable rate I can set.”

Winners and losers?

Mohammad Khan, UK general insurance leader at PwC, estimates that the average comprehensive motor insurance policy will rise by between £50 and £75 as a result.

He added that drivers under the age of 22 will be worst affected, as policies increase by up to £1,000 a year. Older drivers could see rises of up to £300.

Steve Treloar, managing director of general insurance at insurer LV, said: "The change to the discount rate will significantly increase the cost of the largest personal injury claims and disproportionately hit the premiums of those most likely to cause them – younger and older drivers.

"This announcement risks pricing [them] off the road."

Insurance companies are clearly worried as their finances are expected to take a massive knock. For example, Direct Line has predicted that its pre-tax profits will fall by as much as £230 million as a result.

By contrast, severe injury victims will benefit from the change as they will receive far higher payouts than before.

In cases where negligence claims are made against the NHS, the bill could rise by £1 billion. However, the government has promised that the NHS Litigation Authority will be covered for any extra cost.

Now that the new Discount Rate has been set, the MoJ will launch a consultation on how the system can be made fairer.

What can I do now?

You should definitely shop around for cheaper car insurance as prices could soon rise sharply.

On top of the potential hikes that arise from the Discount Rate change, there's also an imminent increase to Insurance Premium Tax, which will further push up prices in April.

So even if your current policy isn't about to expire this week, or even month, you could be better off locking into a new deal before these price hikes bite.

Use a comparison engine to search for the cheapest policy that meets your needs.

Don’t forget to check Aviva and Direct Line too as neither of them appear on comparison websites.

Looking for cheaper car insurance? Try this one simple search and see if you could save