Julian Knight: We all lose out in this greedy cash-in on car crashes

All drivers have to pay through rising premiums when the insurance market connives in high costs
  • @ukmoneyguru

You may think, particularly if you have a protected no claims, that you don't pay, it's just your car insurer? But it isn't ultimately, it is you, me and all the other insured drivers through ever-rising premiums.

The Office of Fair Trading has provisionally (why only provisionally?) referred the "dysfunctional" car insurance market to the Competition Commission. But only on a very narrow premise. Basically, if someone crashes into you, the at-fault driver's insurer is responsible for meeting the cost of repairs and replacement vehicles for the not-at-fault driver.

These costs, it seems, are being inflated by all parties with the connivance of the insurers, as a means of damaging the bottom line of their rivals and earning themselves referral fees. As you can guess this is self-defeating, as every insurer has fault claims and the high costs get shared around and, of course, they are passed on to drivers through higher premiums.

I'm not going to go off on one blaming the insurers as this is just one relatively small example of the bigger problem in the car insurance market. Have a prang and it's a financial free-for-all, the tow truck, the bodyshop repairer, the passenger putting in a whiplash claim, the hospital treating any injured, the car-hire companies and of course the ambulance-chasing lawyers.

Despite the practice of referral fees, car insurance is one of the least profitable areas for insurers because it is a mess. The truth is that the wider market exemplifies much that is wrong with our society as it is pervaded with greed and a lot of fraud by individuals and companies. We are all losers, and not just financially.

Get real over growth

Seven per cent growth a year sounds like cloud-cuckoo land if you are a saver. Nevertheless, 7 per cent is the key figure when advisers and insurers want to project how much investments today will be worth in the future.

Now, the Financial Services Authority has started one of its interminable consultations on whether the figures used for projections should be lowered to take account of – and this is my word here not theirs – reality.

Projections are important. During the endowment and pensions mis-selling of the 1980s and 1990s projections of 9 or 11 per cent annual returns were used to hoodwink consumers into signing on the dotted line and the use of these stats was allowed to persist well beyond the time they ceased to have any grounding in, yes that word again, reality.

I should be pleased the FSA is finally looking at this. But I don't quite know what there is to consult about. It seems obvious that with a retirement savings crisis and incredibly low returns we need to veer on the side of caution with projections. Until this is done I would take any projection with a massive dose of salt.

Halve it and you may have a figure closer related to... reality.