OFT launches inquiry into soaring cost of car cover

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The Office of Fair Trading has begun investigating Britain's £10 billion car insurance industry after finding the cost of premiums had jumped 21 per cent in the last two years.

The regulator said yesterday it had "reasonable grounds" to suspect repair garages and replacement car hire firms were restricting competition, pushing up the cost of insurance for drivers. The OFT said it believes insurers paying out third-party claims for repairs and courtesy cars "find it difficult to assess [whether] costs claimed are reasonable".

The watchdog laid part of the blame for the hike in premiums on referral fees – payments insurers receive for passing on details of accident victims to third parties. But it is not investigating these as the Government has already set out plans to ban them, with Justice Minister Jonathan Djanogly condemning the fees as "a racket".

That announcement in September hit shares in insurers such as Admiral, which makes about 6 per cent of its profits from referral fees.

Andy Hughes, at Exane BNP Paribas, said insurers receive around £300 for each victim of a non-fault car crash that they pass on to courtesy car companies: "Earning ancillaries was seen as key strength of Admiral."

Sonya Branch, of the OFT, said: "In the provision of third-party vehicle repairs and credit hire replacement vehicles to claimants, we suspect companies may be competing to extract money from each other rather than keeping premiums as low as possible."

The regulator will also look at whether insurers are failing to give drivers enough information about their "complex" legal protection products, and whether "guaranteed" prices on comparison websites are hitting competition. The competition watchdog expects to complete its market study by the spring.