OFT to investigate cost of motor insurance

| December 14, 2011 | 0 Comments
OFT to investigate cost of motor insurance

Soaring motor insurance premiums have prompted an investigation by the Office of Fair Trading (OFT), which could lead to a Competition Commission inquiry into the industry.

Car insurance premiums increased by 12 per cent between 2009 and 2010 and by a further 9 per cent in the first nine months of this year.

The average price of a motor insurance policy is now a hefty £921, while young drivers face average premiums of £2,400.

The OFT started looking into referral fees in September and has identified a number of practices which could be distorting the market, leading to higher premiums.

It found that car hire firms are providing courtesy cars to not-at-fault drivers while their damaged car is repaired, at a higher rate than the insurer would pay if it had made the arrangement itself.

These car hire firms pay referral fees to insurance companies, brokers and breakdown firms in return for the details of policyholders who have been involved in accidents, to whom they can sell their services.

Last year not-at-fault drivers were charged between £1,200 and £1,500 to hire a courtesy car from a specialist firm but if the arrangement had been made by the insurance company the cost would have been between £400 and £600.

Garages may also pay referral fees to insurance companies, who then stipulate that expensive paint and parts must be used for the repair.

This leads to the company insuring the at-fault driver having to pay falsely-inflated costs, which may include higher than necessary labour costs.

If the OFT decides to refer its findings to the Competition Commission, far-reaching reforms could be introduced.

Earlier this month an investigation by the OFT led to limits being set on how price information for motor insurance could be shared.

There was concern that insurers were sharing information about future pricing of motor insurance with brokers.

The brokers subsequently used software company SSP Ltd, to share this information on an information exchange service.

Insurers could then use the information exchange, provided by Experian, to compare their prices with competitors’ prices, potentially distorting competition through coordinated price setting agreements.

The companies concerned have agreed to formal commitments limiting the information that can be published through Experian’s software.

Tags: courtesy cars, , , referral fees

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