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Car insurance facing Competition Commission study Car insurance facing Competition Commission study
(40 minutes later)
Car insurance costs are set to be studied by the Competition Commission after the Office of Fair Trading (OFT) said the market was "dysfunctional".Car insurance costs are set to be studied by the Competition Commission after the Office of Fair Trading (OFT) said the market was "dysfunctional".
The OFT says artificially high car hire and repair charges add £255m a year to drivers' premiums and it wants the commission to investigate the sector. The OFT says artificially high car hire and repair charges add £225m a year to drivers' premiums and it wants the commission to investigate the sector.
The watchdog says insurers connive with garages and suppliers of courtesy cars to let them charge inflated prices. It says some insurers connive with garages and suppliers of courtesy cars to let them charge inflated prices.
The OFT said this ended up being paid for by drivers.The OFT said this ended up being paid for by drivers.
John Fingleton, chief executive of the OFT, said there was no "quick fix" for the problem, which is why he wanted the Competition Commission to launch a full in-depth enquiry. John Fingleton, chief executive of the OFT, said there was no "quick fix" for the problem, which is why he wanted the Competition Commission to launch a full in-depth inquiry.
"Competition in this market does not appear to work well for drivers.""Competition in this market does not appear to work well for drivers."
Referral feesReferral fees
The OFT started looking at the cost of repairs and the supply of temporary replacement vehicles in September.The OFT started looking at the cost of repairs and the supply of temporary replacement vehicles in September.
This followed the exposure last year of the system of referral fees, under which insurers, in effect, stoke up claims against themselves and thus drive up premiums.This followed the exposure last year of the system of referral fees, under which insurers, in effect, stoke up claims against themselves and thus drive up premiums.
They do this by selling details of their own policy holders' accidents to solicitors, who then encourage those drivers to sue for damages such as whiplash injury.They do this by selling details of their own policy holders' accidents to solicitors, who then encourage those drivers to sue for damages such as whiplash injury.
In its latest study, the OFT pinpointed the way in which other extra costs, and thus higher premiums, were generated.In its latest study, the OFT pinpointed the way in which other extra costs, and thus higher premiums, were generated.
It explained that when a claim is made, the insurer of the "at-fault" driver will have to pay for repairs and temporary car hire for the other driver in the accident.It explained that when a claim is made, the insurer of the "at-fault" driver will have to pay for repairs and temporary car hire for the other driver in the accident.
But the suppliers of these services, and their costs, are inflated by the insurer of the "not-at-fault" driver arranging artificially expensive car hire deals and repairs.But the suppliers of these services, and their costs, are inflated by the insurer of the "not-at-fault" driver arranging artificially expensive car hire deals and repairs.
The insurers do this in return for a lucrative fee from the car hire firm or garage involved.The insurers do this in return for a lucrative fee from the car hire firm or garage involved.
This made replacement car hire on average £560 more expensive each time, and made each repair on average £155 more expensive as well, the OFT said.This made replacement car hire on average £560 more expensive each time, and made each repair on average £155 more expensive as well, the OFT said.
The cost is borne by the insurer of the "at-fault" driver, but is eventually passed on in the form of higher premiums.The cost is borne by the insurer of the "at-fault" driver, but is eventually passed on in the form of higher premiums.
"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," the OFT explained."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," the OFT explained.
"This is an inefficient way for the sector to operate, raising the total costs for providing private motor insurance which drivers end up paying.""This is an inefficient way for the sector to operate, raising the total costs for providing private motor insurance which drivers end up paying."
WhiplashWhiplash
The OFT's decision to refer the car insurance market to the Competition Commission is a provisional one. It will announce its final decision in October 2012.The OFT's decision to refer the car insurance market to the Competition Commission is a provisional one. It will announce its final decision in October 2012.
But the Credit Hire Organisation (CHO), which represents car hirers, said the excessive costs identified by the OFT were just 2% of the car insurance industry's total spending of £13bn a year.But the Credit Hire Organisation (CHO), which represents car hirers, said the excessive costs identified by the OFT were just 2% of the car insurance industry's total spending of £13bn a year.
"The original decision of the OFT to investigate the private motor insurance market came after insurer claims that motor insurance premiums had risen by almost 40% to compensate for the increased costs of personal injury claims (whiplash) and other costs including those of credit hire," said Martin Andrews of the CHO."The original decision of the OFT to investigate the private motor insurance market came after insurer claims that motor insurance premiums had risen by almost 40% to compensate for the increased costs of personal injury claims (whiplash) and other costs including those of credit hire," said Martin Andrews of the CHO.
"The Transport Select Committee subsequently identified that these claims were unfounded and the rise in premiums was in fact closer to 12% and was caused by the increase in whiplash claims more than any other factor," he added."The Transport Select Committee subsequently identified that these claims were unfounded and the rise in premiums was in fact closer to 12% and was caused by the increase in whiplash claims more than any other factor," he added.
Earlier this year, the government said it would take action to cut down on spurious whiplash insurance claims.Earlier this year, the government said it would take action to cut down on spurious whiplash insurance claims.
The Transport Committee had urged the government to change the law so that such claims could only be paid if there was objective evidence of both an injury and of its having a significant effect on the claimant's life.The Transport Committee had urged the government to change the law so that such claims could only be paid if there was objective evidence of both an injury and of its having a significant effect on the claimant's life.
These claims alone are thought to cost the insurers £2bn a year and their rapid growth in the UK has made the country the "whiplash capital" of Europe.These claims alone are thought to cost the insurers £2bn a year and their rapid growth in the UK has made the country the "whiplash capital" of Europe.
What do you think of the OFT's decision to study insurance costs? What is your own experience of car insurance premiums? Send us your comments using the form below.What do you think of the OFT's decision to study insurance costs? What is your own experience of car insurance premiums? Send us your comments using the form below.