Car Insurance Scrutinised Over High Premiums

The Office of Fair Trading has referred the private motor insurance market to the Competition Commission for further investigation amid concerns that the market is dysfunctional.

The OFT, which provisionally decided to refer the industry to the commission in May, said there was "no quick fix" to the problems identified and that further investigation was needed.

The commission now has up to two years to report its findings, and OFT head Clive Maxwell said: "Competition appears not to be working effectively in the private motor insurance market.

"The insurers of at-fault drivers appear to have little control over the bills they must pay, and this may be leading to higher costs for them and ultimately higher premiums for motorists."

News of the referral came just hours before Royal Bank of Scotland put the finishing touches to the stock market flotation of its Direct Line Group insurance arm.

It announced the float price between £1.60 and £1.95, representing between 25% and 33% of the existing shares and giving the group a market capitalisation of some £2.6bn.

In May, the OFT said the motor insurance market was "dysfunctional", with signs that insurers of at-fault drivers are being taken advantage of by insurers of not-at-fault drivers and others involved in providing repairs and courtesy cars.

This is thought to be inflating the cost of providing replacement vehicles by an average of £560 a time, while the cost of repairs was £155 more.

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.

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.

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.

But, in response to the move, Credit Hire Organisation (CHO) director general Martin Andrews said: "The CHO understands this move from the OFT, given the complexity of insurer behaviour in the market for the supply of motor insurance and related goods and services.

"However, we continue to have serious concerns as to the long-term impact it may have on the motoring consumer and their right to mobility after an accident that was not their fault."