‘Dysfunctional’ car insurance industry called to account

Covered mag, presented by Gocompare.com
  • | by Kristian Dando

The car insurance industry has been referred to the Competition Commission by the Office of Fair Trading (OFT).

The OFT says that the marketplace is “dysfunctional,” with poor practices adding £225m to the collective annual premium of Britain’s motorists – that’s about £10 per policy. The OFT claims that some insurers are in cahoots with repair companies and car hire firms, and allow them to charge over-inflated prices after accidents, with the bill ultimately being footed by the driver.

It's reckoned that replacement cars are on average £560 more expensive than they should be, and repairs around £155 more expensive. It follows last year’s exposure of referral fees, in which insurers sell details of their own policyholders' accidents to solicitors, who in turn badger drivers to sue for damages on issues like whiplash injuries.

The OFT said: "Insurers of the not-at-fault driver and others, such as brokers, credit hire organisations and repairers, can take advantage of this lack of control as an opportunity to generate revenues through rebates and referral fees and so inflate the costs of insurers of at-fault drivers. "This is an inefficient way for the sector to operate, raising the total costs for providing private motor insurance which drivers end up paying."

A separate investigation of whiplash claims is also currently underway. The decision by the OFT to refer to the Competition Commission is provisional, and a full decision will be taken in October 2012.

Expert’s view: Scott Kelly, Gocompare.com’s head of motor and resident car insurance buff, gives his thoughts on the OFT’s referral

Today’s referral of the motor insurance industry to the Competition Commission by the OFT can only be seen as good news for embattled British drivers.

Any light that can be shone on inefficient practices by the industry, which leads directly to higher insurance costs, can only be of help in reducing the spiralling cost to insure your vehicle. The OFT cited referral fees and credit hire as the two areas where the market is the most dysfunctional.

These are two areas least understood by consumers and many in the industry itself - if the Competition Commission is to complete a credible review and put customers' best interests first and not the profit of insurers and credit hire firms, then they must take very robust view on these practices and recast the rules around claims management in order to end this unfair practice. To many consumers, the idea of insurance companies and related third parties profiting from people’s accidents, injuries and misfortune is morally suspect.

But it also leads directly to higher costs for consumers, as these profits are delivered via higher premiums. If the Competition Commission uphold the referral from the OFT, then they must ensure that consumers are treated fairly and that these inefficient and costly practices are ended so that the public can afford to keep their vehicles running and that those priced out of the market can have a fighting chance of getting on the road.