The new rate will be effective 20 March 2017.
The Lord Chancellor and Justice Secretary, Liz Truss, has cut the discount rate - also known as the Ogden rate - from 2.5% to minus 0.75% effective 20 March 2017.
The rate is used by courts when applying a calculation to the returns on the lowest risk investments,typically Index Linked Gilts, for victims of life-changing injuries who accept lump sum compensation payments.
The actual amount they receive is adjusted according to the interest they can expect to earn by investing it.
By making the rate negative insurers will be hit by having to increase compensation sums whereas previously there was a reduction.
In a statement the Ministry of Justice (MoJ) highlighted the law makes clear that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on this lump sum, often for long periods or the duration of their life.
It added that compensation awards using the rate should put the claimant in the same financial position had they not been injured, including loss of future earnings and care costs.
Truss said: "The law is absolutely clear - as Lord Chancellor, I must make sure the right rate is set to compensate claimants.
"I am clear that this is the only legally acceptable rate I can set."
The discount rate had been unchanged since 2001 and the MoJ accepted that the decision will have "a significant impact on the insurance industry"and a knock-on effect on public services with large personal injury liabilities- particularly the NHS.
Accordingly the government has committed that Chancellor of the Exchequer Philip Hammond will meet representatives of the insurance industry to assess the impact of the rate adjustment.
It will also launch a consultation before Easter to consider options for reform - including whether the rate should in future be set by an independent body; whether more frequent reviews would improve predictability and certainty for all parties; and whether the methodology is appropriate for the future.
Insurers are already making noises that the impact of the change in the discount rate will almost immediately effect rating and premium pricing increases will be seen over the coming weeks.