The insurance industry could face a bill for hundreds of millions of pounds if the Lord Chancellor alters the levels for compensation payouts.

Pressure is mounting on the Lord Chancellor to cut the Ogden rate from three per cent to two per cent – which would send payouts for serious long-term injuries soaring.

Motor insurers would take the brunt of the payouts at a time when the market is still making a loss despite double digit premium rises this year.

Actuaries Bacon and Woodrow estimates that premiums already need to rise by another ten per cent this year if the market is to break even.

"After four years of cut-throat rates, motor premiums have risen dramatically this year," said associate Nigel Munns. "But claims inflation could make these rises ineffective."

The Ogden rate sets the return to be expected when a seriously injured person, facing a loss of earnings or needing care costs, invests the damages they are awarded.

Last year, the House of Lords lowered this multiplier from 4.5% to 3% because it ruled the return should be based on a presumed investment in Index Linked Government Stocks – a move the ABI estimated cost the insurance industry £450m retrospectively.

Now Lord Irvine is under pressure to cut the rate again because the yield of Government stocks has fallen. One analyst estimates a one per cent cut would cost more than £300m.

Next month, his office issues a consultation document on the issue. The ABI is warning the Lord Chancellor to consider the added cost to society.

"Consideration must be given to the inequity of imposing a retrospective tax on the insurance industry," said spokesman Vic Rance.

Other factors are also causing havoc on future claims calculations.

A Law Commission report, number 257, recommends that damages for non-pecuniary loss in cases of serious personal injury, such as whiplash, should be increased by at least 50%, but not more than 100%.

This could be implemented through test cases in the Court of Appeal.

In addition, last year, the NHS Clawback Bill added £100m on to the insurance industry bill.