National: Motor insurance market faces Competition Commission inquiry

THE motor insurance market was today facing an investigation by the Competition Commission after a report found the market was “dysfunctional” and pushed up premiums by �225million a year.

The report by the Office of Fair Trading (OFT) found premiums paid by drivers are being ramped up because of referral fees and the fact that insurers of at-fault drivers have little control over the way in which repairs are carried out.

This dysfunctional system inflated the cost of providing replacement vehicles by an average of �560 a time, while the cost of repairs was �155 more.

OFT chief executive John Fingleton 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.”

The report found that the system does not work efficiently because the insurers of at-fault drivers foot the bill for repairs which are organised by the insurers of not-at-fault drivers.

It said after crashes, many insurers of not-at-fault drivers, brokers and repairers, refer the drivers to organisations that tend to charge higher rates in exchange for referral fees of around �250 to �400 per hire car.

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The bills paid by the insurers of at-fault drivers can be inflated further because not-at-fault drivers are given replacement vehicles for longer than necessary.

When it comes to repairs, bills paid by the insurers of at-fault drivers are pushed up because some insurers receive referral fees and rebates from repairers and suppliers.

And some insurers even have agreements with repairers to charge higher labour rates when repairing the vehicle of the not-at-fault driver.

These practices boost the revenues of the insurer of the not-at-fault driver as well as pushing up the costs for the insurers of the at-fault driver. The higher costs are eventually passed on to drivers through higher premiums.

Mr Fingleton added that there was no “quick fix” for the problems but a more in-depth investigation by the Competition Commission may be necessary.

The Association of British Insurers’ director of general insurance Nick Starling welcomed the investigation.

He told BBC Radio 4’s Today programme: “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 insurance premiums for customers and we think this potential reference to the Competition Commission has the potential to sort the issue out.”

Mr Starling said costs had “run away” and accused brokers and hire firms of “taking advantage of the system”.

He added: “The whole market is becoming circular and dysfunctional,” but warned there were no “quick fixes”.