A key interest rate used to calculate personal injury compensation remains at unrealistic negative levels following a reset last week, the Association of British Insurers (ABI) says.

The discount rate has been raised to minus 0.25% by the UK Government following a review, compared to minus 0.75% previously.

“This is a bad outcome for insurance customers and taxpayers that will add costs rather than save customers money,” ABI Director-General Huw Evans said.

“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.”

The discount rate reflects the return that personal injury claimants can expect to receive when they invest lump-sum compensation. A lower rate means a higher payout.

The rate was last set two years ago when it was cut from 2.5% to negative levels, prompting an outcry from the insurance industry and concerns claimants would be overcompensated.

The ABI says last week’s revision still leaves the rate out of step with international levels.

“This will remain the lowest discount rate in the Western world, leaving England and Wales an international outlier at a time when we need to boost our attraction to international capital,” Mr Evans said.

Ratings agency AM Best says the decision may lead to insurer reserve releases or strengthening, depending on their rate assumptions, but some were expecting a shift towards 0-1%.

“Overall, insurers will be disappointed that the change did not meet industry expectations and policyholders are unlikely to see meaningful motor or liability premium reductions in the near future,” Director of Analytics Timothy Prince said.

The new rate, which takes effect on August 5, was set after discussions with personal injury lawyers, insurers, investment experts and public bodies. It will be reviewed again within five years.

“I am certain this is the most balanced and fair approach following an extensive consultation,” Lord Chancellor and Justice Secretary David Gauke said.