The government's decision to lower the discount rate for personal injury compensation will cost the insurance industry £350m, according to motor insurance actuaries English Matthews Brockman (EMB).

The rate fell from 3% to 2.5%. EMB said premium rates in the motor market would need to rise 2.3% for the industry to recover the costs of the new higher level of payments. Liability insurers were likely to be hit even harder by the decision and would need to raise rates by an estimated 8%, most of which will cover the cost of unsettled past claims.

Mike Brockman, an EMB partner said: "Higher personal injury awards may be socially desirable, but the public should understand that the money can only come in the long run from higher premiums."

Roy Hebburn, divisional claims manager at Allianz Cornhill, said the decision could cost the industry as much as £500m. He pointed out the retrospective effect of the decision and said it would hit long-tail claims in particular.

The Association of British Insurers (ABI) said it was disappointed at the decision. It said the change would lead to increased damage awards.

John Parker, the ABI's head of general insurance said: "This decision will increase insurers' costs and certainly will not help keep premiums down in the classes most likely to be affected – motor and employer's liability."