Insurers set for referral to competition watchdog over inflated premiums

Insurance companies are taking advantage of the system to inflate premiums for drivers by £225m a year, the Office of Fair Trading (OFT) reports today.

The competition watchdog says that after a road traffic accident, insurers of the not-at-fault driver and others, such as brokers, credit hire organisations and repairers, exploit a lack of control in the current system. They charge referral fees for using expensive hire organisations and then add to the cost by replacing the car for longer than necessary.

The OFT has provisionally decided to refer the private motor insurance market to the Competition Commission after finding evidence that firms are competing in a ‘dysfunctional way’.

The report states that the government has focused its attention on reducing the cost of personal injury claims, but without intervention in the cost of replacement vehicles and repairs, artificially-inflated premiums are ‘likely to persist’.

John Fingleton, chief executive of the OFT, said: 'Competition in this market does not appear to work well for drivers. We believe the focus that insurers have on gaining the competitive edge through raising their rivals' costs means that drivers pay more than they need to for their motor insurance policies.

'Because insurers are distracted from competing primarily on the quality and value of service provided to insured drivers, incentives for greater efficiency may be reduced.’

Donna Scully, chairman of the Motor Accident Solicitors' Society (MASS), said the scale of the problem could be 'immense' once it is fully investigated.

'Money is clearly being made from consumers behind their backs and MASS would welcome full disclosure of specific fee income on every case so that the consumer is fully informed,' she said.

'It is no wonder the whole sector has fallen into disrepute and that consumers are so wary of everyone who operates in it, and frustrated by exploitative practices they are likely to encounter when they make a claim.'

The Association of British Insurers welcomed the report but declined to address the accusations over its members receiving referral fees from credit hire companies.

Nick Starling, director of general insurance for the ABI, said: 'For too long insurers have faced inflated rates for credit hire cars and excessive hire periods which have led to higher insurance premiums for customers.

'Regulation of all players in the market to tackle excessive costs is needed, and we hope that the work by the Competition Commission will bring much needed reforms that in turn will result in lower car insurance premiums for consumers.'

The report says that after accidents, many insurers of the not-at-fault drivers refer those drivers to credit hire organisations that tend to charge higher daily rates, in exchange for a referral fee of between £250 and £400 per car hire. The not-at-fault drivers appear to receive replacement vehicles for longer periods than necessary, leading to inflated bills for the at-fault driver’s insurer to cover.

The cost of vehicle repair and replacement vehicles is estimated to add around £10 to the premium of every driver in the UK.

Interested parties wishing to respond to the consultation on the proposed market investigation reference can send written representations to the OFT before 6 July by emailing motorinsurance@oft.gsi.gov.uk.

The OFT expects to reach a final decision by October 2012.