Office of Fair Trading Investigation into Car Insurance Costs

22/12/2011
The cost of motor insurance is to be investigated by the Office of Fair Trading (OFT).  The regulator began investigating the rising cost of car insurance premiums in September, after an outcry about the system of referral fees.

The cost of motor insurance is to be investigated by the Office of Fair Trading (OFT).  The regulator began investigating the rising cost of car insurance premiums in September, after an outcry about the system of referral fees.

The OFT will also look at the cost of accident repairs and replacement cars.  Sonya Branch of the OFT said: "Our concerns relate to the provision of third party vehicle repairs and credit hire replacement vehicles to claimants, where we suspect companies may be competing to extract money from each other rather than keeping premiums as low as possible and providing car owners with value for money.”

"By carrying out a market study, we aim to clarify whether a market investigation reference to the Competition Commission is appropriate," she warned.

The preliminary evidence has exposed concerns about the referral-fees which has had a direct impact on the increase in premiums.  Firstly specialist hire firms offer temporary cars to not-at-fault drivers while their car is being repaired, but they charge much more than the insurer would pay if it arranged the courtesy car itself.  At the same time, the specialist car hire suppliers pay referral fees to insurers, insurance brokers and breakdown firms for details of policyholders involved in accidents, to whom they can sell their services.

In the end all this is paid for by the insurer of the at-fault driver involved in a claim, hence bumping up car insurance premiums.
  
Despite increasing premium concerns, the OFT said the cost of motor insurance had not been rising as fast as had been previously claimed.  The AA reported earlier this year that average premiums had risen by 40% in the year to April.  But the OFT says premiums have gone up by rather less - by 12% between 2009 and 2010 and by a further 9% in the first nine months of 2011.

The OFT’s next stage of inquiry is likely to lead to the selling and pricing of car insurance being investigated by the Competition Commission, which would have the power to enforce significant reforms.

The Association of British Insurers (ABI) said it welcomed the OFT's forthcoming study, and hoped it would lead to lower costs and premiums.  "The industry has long said that there are unnecessary costs in the system and that there are inefficiencies that need to be addressed - from personal injury to credit hire to credit repair - and we are pleased that the OFT have recognised this in their report," said Nick Starling of the ABI.