Car insurance facing Competition Commission study

 

Sonya Branch from the Office of Fair Trading says the insurance market is not running in the most efficient way

Car insurance costs are set to be studied by the Competition Commission after the Office of Fair Trading (OFT) said the market was "dysfunctional".

The OFT says artificially high car hire and repair charges add £225m a year to drivers' premiums and it wants the commission to investigate the sector.

It says some insurers connive with garages and suppliers of courtesy cars to let them charge inflated prices.

The OFT's announcement was welcomed by the Association of British Insurers.

'Higher premiums'

John Fingleton, chief executive of the OFT, warned there was no "quick fix" for the problem, which is why he wanted the Competition Commission to launch a full inquiry.

"Competition in this market does not appear to work well for drivers."

Nick Starling of the Association of British Insurers (ABI) agreed, pointing out that drivers were bearing the cost.

"For too long insurers and people paying premiums have faced inflated rates for credit hire cars and excessive hire periods, which have led to higher premiums," he said.

"There is no control of costs which have run away, and some people have taken advantage of the system," Mr Starling added.

Referral fees

The OFT explained that when a claim is made, the insurer of the "at-fault" driver will have to pay for repairs and temporary car hire for the other driver in the accident.

Analysis

If any more evidence was needed that car insurance has turned into a gravy train for a variety of businesses, it is here for all to see in the OFT's market study.

The fat charges from repair shops and car hire firms which the OFT focused on are by no means the worst of the problem.

Ballooning personal injury claims, which the Ministry of Justice is supposed to be dealing with, have a far bigger impact on the size of premiums.

The epidemic of whiplash claims, on its own, adds nine times as much to the cost of car insurance as the issues being raised today.

But a Competition Commission inquiry will shine an even brighter light into the murky world of backhanders which has distorted car insurance and led to policies becoming unaffordable for some drivers.

Claims companies have paid chunky fees to insurers, and even to nurses and police officers, to get hold of contact details for accident victims.

In a similar way, repair shops and specialist car hirers have been slipping backhanders to make sure their services are used, at an inflated price.

The backlash started with a report from a select committee of MPs, which criticised the "merry-go-round" of fees.

Perhaps now the smile will be wiped off the faces of players in the industry who have been riding this particular carousel.

But these costs are inflated by the insurer of the "not-at-fault" driver arranging artificially expensive car hire deals and repairs.

The insurers do this in return for a lucrative fee from the car hire firm or garage involved.

This made replacement car hire on average £560 more expensive each time, and made each repair on average £155 more expensive as well, the OFT said.

The cost is borne by the insurer of the "at-fault" driver, but is eventually passed on in the form of higher premiums.

"Insurers of the not-at-fault driver and others, such as brokers, credit hire organisations and repairers, can take advantage of this lack of control as an opportunity to generate revenues through rebates and referral fees and so inflate the costs of insurers of at-fault drivers," the OFT explained.

"This is an inefficient way for the sector to operate, raising the total costs for providing private motor insurance which drivers end up paying."

The OFT's decision to refer the car insurance market to the Competition Commission is a provisional one. It will announce its final decision in October 2012.

Which? executive director, Richard Lloyd, said change was needed: "Consumers have been hit time and again with significant increases in costs for their car insurance without seeing increased benefits to their policy.

"We would also welcome an investigation by the Competition Commission to put an end to bad practices and give consumers get a better deal on their car insurance."

Whiplash

The OFT started looking at the cost of repairs and the supply of temporary replacement vehicles in September.

This followed the exposure last year of the covert system of referral fees, under which insurers, in effect, stoke up claims against themselves and thus drive up premiums.

They do this by selling details of their own policy holders' accidents to solicitors, who then encourage those drivers to sue for damages such as whiplash injury.

The Credit Hire Organisation (CHO), which represents car hirers, said the excessive costs identified by the OFT in its latest report were just 2% of the car insurance industry's total spending of £13bn a year.

"The original decision of the OFT to investigate the private motor insurance market came after insurer claims that motor insurance premiums had risen by almost 40% to compensate for the increased costs of personal injury claims (whiplash) and other costs including those of credit hire," said Martin Andrews of the CHO.

"The Transport Select Committee subsequently identified that these claims were unfounded and the rise in premiums was in fact closer to 12% and was caused by the increase in whiplash claims more than any other factor," he added.

Earlier this year, the government said it would take action to cut down on spurious whiplash insurance claims.

The Transport Committee had urged the government to change the law so that such claims could only be paid if there was objective evidence of both an injury and of its having a significant effect on the claimant's life.

These claims alone are thought to cost the insurers £2bn a year and their rapid growth in the UK has made the country the "whiplash capital" of Europe.

 

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  • rate this
    +96

    Comment number 149.

    Long overdue.
    Insurance is required by law if you have a car, so you HAVE to buy it. But there are no controls on how much it costs so insurance companies can and do charge what they want.
    If the investigation shows foul play, the insurance companies should be forced to repay the overcharged monies (with interest) they have fleeced from their customers.

  • rate this
    +51

    Comment number 138.

    On top of all this you are now pressured into "insuring your insurance" with protected no claims. Most of which is rubbish as it can only be applied if you remain with the same company as many other companies ask now if you have ever had a claim which would have resulted in a loss of NCD had you not had protection in place.

    Competition is supposed to keep prices low not drive them up!

  • rate this
    +106

    Comment number 34.

    Hit by a bus, saw it coming and stopped - we got pestered daily for weeks by various companies enquiring if we were 'sure' we didn't have whiplash! The hire car company didn't collect their car for 5 days after we advised them we had our own vehicle back - although no fault on my part my premium increased by £100 on renewal - what a rip off the whole business is - very cross!!

  • rate this
    +72

    Comment number 24.

    Insurance is the biggest con going!!!!!! We were told uninsured drivers was the problem, that goes down so now it is whiplash claims, that will go down so now it is courtesy cars!!! Problem is you have to buy it by law so it is a captive market!!!!!

  • rate this
    +41

    Comment number 20.

    We are all paying too much in insurance premiums and a cottage industry has grown up of inflated costs associated with accidents ie car hire , legal and whiplash and probably the smallest cost is the actual repair . I think a close examination of the figures across the industry will identify where there is fraud and overcharging and its about time it was addressed for the benefit of motorists .

 

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