Competition Commission to investigate car insurance market

| May 31, 2012
Competition Commission to investigate car insurance market

Concerns over “dysfunctional” business practices have led the Office of Fair Trading (OFT) to refer the private motor insurance market to the Competition Commission.

A report by the OFT suggests that artificially high charges could be causing car insurance premiums to increase unnecessarily.

The problem centres around the referral fees which car hire and repair companies pay to motor insurers.

Following an accident, the insurer of the at-fault driver pays for repairs to damaged vehicles and for car hire while the vehicles are off the road.

The insurer of the not-at-fault driver often refers the driver to car repair and car hire companies from which it has received a referral fee.

To offset the cost of the referral fee, these companies charge higher rates to the insurer of the at-fault driver for carrying out the work.

Sometimes they even allow the driver to use a replacement vehicle for longer than necessary, which increases the fee paid by the insurer of the at-fault driver even more.

Some insurers have agreements with car repair companies to charge higher than usual labour rates for repairs to the vehicle of the not-at-fault driver.

The higher costs incurred by the insurers of at-fault drivers as a result of these practices are ultimately passed on to drivers in the form of more expensive car insurance premiums.

The OFT estimates that the system makes car insurance premiums £225m a year more expensive.

It found that the system inflates the cost of providing a replacement vehicle by £560 a time on average, and pushes up the cost of repairs by £155.

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.”

However the Credit Hire Organisation (CHO), which represents car hire companies said that whiplash claims were the main factor causing
motor insurance premiums to increase.

According to the Financial Times, Liverpool is whiplash capital of Britain, with more than one compensation claim for neck injuries caused by a traffic accident for every 50 residents.

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