The Ministry of Justice (MoJ) has launched a consultation on proposals to cut the high number of whiplash claims, which will allow insurers to lower their premiums.
Car owners could have their insurance costs cut by £40 a year under the new plans, the MoJ has said.
Insurers have promised to pass on savings to drivers – worth a total of £1 billion.
Whiplash claims are now 50% higher than they were a decade ago and ministers have called the problem an “epidemic” being fuelled by a predatory claims industry that encourages minor, exaggerated and fraudulent claims.
The consultation will run from January 6 2017 and sets out plans to scrap the right to compensation or limit the amount people can claim for minor whiplash injuries.
Capping compensation would see the average payout cut from £1,850 to a maximum amount of £425, which would only be paid out if a medical report was provided as proof of injury.
Justice Secretary Elizabeth Truss said: "For too long, some have exploited a rampant compensation culture and seen whiplash claims an easy payday, driving up costs for millions of law-abiding motorists.
"These reforms will crack down on minor, exaggerated and fraudulent claims."
It was revealed on Wednesday that around 99% of private motor insurance claims resulted in a payout, according to research by the Association of British Insurers (ABI).
The figures covered claims made throughout 2014 and 2015. The average payment received on a claim was £2,347.
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RAC director of insurance Mark Godfrey said while the organisation “broadly” supported the Government’s announcement it is crucial that genuine claims are still upheld.
He said: “While bogus claims must be stamped out, it is crucial that motorists that have genuine claims are not disadvantaged, which is why we now look forward to seeing the finer detail of the Government’s proposals.
“The present system is now widely regarded as broken and in need of reform – in recent years insurers have been inundated by false or inflated claims which are unfairly pushing up premiums for all motorists in the UK.”
“This is in addition to other, unrelated costs which are further increasing the cost of insurance, such as the two recent rises in Insurance Premium Tax,” he added.
Mr Godfrey also welcomed the possibility of cuts to insurance costs.
“Insurers have pledged to pass on savings brought about by the whiplash claim crackdown announced today – it is imperative that they follow through with this commitment to the benefit of honest motorists,” he said.