(Reuters) — Britain plans to alter the interest rate used to calculate how much in compensation should be paid by insurers for personal injuries, the Ministry of Justice said on Thursday, in a move to reduce the size of awards as well as the cost of insurance.

Vehicle insurers' profits were dented and insurance premiums have risen since Britain in February unexpectedly cut the so-called Ogden discount rate to -0.75% from 2.5% previously.

A lower rate requires insurers to make larger lump sum payments on personal injury claims, as it assumes lower annual investment returns for that lump sum. The rate is currently linked to the yield on index-linked gilts.

An outcry from insurers led to a government consultation on how the rate is calculated.

"Based on the evidence currently available, the government would expect that if a single rate were set today under the new approach, the real rate might fall within the range of 0 to 1%," the ministry said in a statement.

Draft legislation to make the change will go before the UK parliament later on Thursday, it said.

The new rate would not be applied retrospectively, it added.

A government paper published on Thursday proposes that the rate be set with reference to "low risk," rather than "very low risk" investments and that the rate be reviewed at least every three years.

Huw Evans, director general of the Association of British Insurers, said the new rate "would better reflect how claimants actually invest their compensation in reality."

"If implemented, it will help relieve some of the cost pressures on motor and liability insurance in a way that can only benefit customers," he said.

However, Brett Dixon, president of the Association of Personal Injury Lawyers, said the new rate "must be set to meet the needs of catastrophically injured people," adding that lower insurance premiums were "of no benefit if (customers) are severely injured and forced to take risks with the compensation they so desperately need.”

Jefferies analysts said the changes could hit legal hurdles.

"If the new methodology does presume that victims take some investment risk, then it could challenge the fundamental principle of full compensation," they said in a note.

"The possibility remains that this legislation is materially altered before it is implemented."

Shares in motor insurer Direct Line were up 2.3% at 380 pence ($4.92) at 1234 GMT, one of the top performers in the FTSE 100 index, while Admiral was down 0.75% at 1,844 pence. Aviva P.L.C. which also has a large motor insurance business, was up 0.1% at 507 pence, while RSA Insurance was down 0.3% at 647 pence.

"If passed, the benefits will be felt by all our customers, helping to stop the rot of steep rises in premiums," said RSA's chief executive, Stephen Hester.