Insurers set for referral to competition watchdog over inflated premiums
Insurance companies are taking advantage of the system to inflate premiums for drivers by £225m a year, the Office of Fair Trading (OFT) reports today.
The competition watchdog says that after a road traffic accident, insurers of the not-at-fault driver and others, such as brokers, credit hire organisations and repairers, exploit a lack of control in the current system. They charge referral fees for using expensive hire organisations and then add to the cost by replacing the car for longer than necessary.
The OFT has provisionally decided to refer the private motor insurance market to the Competition Commission after finding evidence that firms are competing in a ‘dysfunctional way’.
The report states that the government has focused its attention on reducing the cost of personal injury claims, but without intervention in the cost of replacement vehicles and repairs, artificially-inflated premiums are ‘likely to persist’.
John Fingleton, chief executive of the OFT, 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.
'Because insurers are distracted from competing primarily on the quality and value of service provided to insured drivers, incentives for greater efficiency may be reduced.’
Donna Scully, chairman of the Motor Accident Solicitors' Society (MASS), said the scale of the problem could be 'immense' once it is fully investigated.
'Money is clearly being made from consumers behind their backs and MASS would welcome full disclosure of specific fee income on every case so that the consumer is fully informed,' she said.
'It is no wonder the whole sector has fallen into disrepute and that consumers are so wary of everyone who operates in it, and frustrated by exploitative practices they are likely to encounter when they make a claim.'
The Association of British Insurers welcomed the report but declined to address the accusations over its members receiving referral fees from credit hire companies.