The motor insurance market is "dysfunctional" and competition between firms is actually forcing British drivers to pay more, a watchdog has said.
Insurers are deliberately ramping up repair and replacement car costs after accidents in order to leave rival firms with higher bills, the Office of Fair Trading suspects. This means motorists are forced to pay higher premiums, as companies attempt to claw back rising costs.
The OFT said competition among insurers has pushed up the cost of cover for British drivers by £225m a year. It plans to refer the industry to the Competition Commission, which could then force insurers and their suppliers to play fair with motorists.
John Fingleton, chief executive of the OFT said: "Competition in this market does not appear to work well for drivers. 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."
The OFT believes the cost of replacement vehicles is currently £560 more expensive than it needs to be. Meanwhile, the cost of repairs is being inflated by £155 each time.
At the heart of the problem are the referral fees and rebates that replacement car suppliers pay to insurers to get business from them. The OFT's evidence suggests insurers pocket the fat fees while effectively encouraging suppliers to inflate bills, knowing that other insurance will have to pick up the tab.
It said after crashes, many insurers of not-at-fault drivers refer drivers to car hire organisations that tend to charge excessive daily rates. In exchange the insurers are paid referral fees of £250 to £400 per hire car. When it comes to repairs, bills paid by the insurers of at-fault drivers are pushed up because some insurers receive referral fees and rebates from repairers, paint suppliers and parts suppliers.
On top of that, the OFT said that "certain insurers have agreements with their approved repairers to charge higher labour rates" which leads to even higher bills. Insurer Direct Line said: "We agree with the OFT's view that elements of the market are dysfunctional."
Aviva said: "Credit hire and repair have been a source of excessive costs which do not benefit insurers or consumers. We have been calling for significant reform of these markets for many years to reduce claims costs."
Car insurance: Q&A
So what have motor insurers been up to now?
According to the Office of Fair Trading they've been colluding with vehicle hire companies, repair firms, paint suppliers, and car parts suppliers to beef up charges.
Why? Doesn't it increase the cost of cover?
Yes, but it seems to be a game of chicken with no firm prepared to make the first move. Because all insurers engage in the activity, says to the OFT, any firm breaking ranks would face a serious disadvantage, losing out on fat referral fees.
So what can the Competition Commission do?
It can ban referral fees and rebates and force insurers to shop around for the best repair quotes.Reuse content