Simon Read: The real reason car insurance costs have soared? Backhanders

Car insurance appears to be a minefield of dodgy charges and blatant backhanders. This week the Office of Fair Trading (OFT) published evidence that showed insurers have been ramping up repair costs and the charge of hiring a replacement vehicle.

It's a shocking tale that reveals the market is out-of-control with no one firm prepared to play fair and stop the dubious practices because they know they'll be hit by rivals continuing the tactics.

The industry seems to have completely lost sight of what it should be doing: that is, providing competitively price cover for drivers. Instead, as OFT chief John Singleton said, "insurers are distracted from competing on the quality and value of service".

What's been going on? According to the OFT, motor insurers have been effectively colluding with vehicle hire companies, repair firms, paint suppliers, and car parts suppliers to beef up charges.

At the heart of the problem are the referral fees and rebates that suppliers pay to insurers in order to get business from them.

Insurers can trouser the fat fees while encouraging suppliers to inflate their bills knowing that other insurance companies will have to pick up the tab.

That's because there are two sets of insurers involved in any accident claim. On the one hand is the company representing the person who may have caused an accident. Working against it is the insurer of the driver of the vehicle that may have been damaged by the other.

The person who has been hit is the not-at-fault driver. His or her insurer arranges the repairs and any replacement vehicle for the policyholder while their car is in the shop.

And herein lies the problem: because the insurer of the not-at-fault driver is not picking up the bill, it doesn't really care how much it comes to. Worse, most insurers, according to the OFT, encourage repair companies and car hire firms to inflate the costs, so that the insurance firm paying the bills has to dig deeper into its pockets.

In effect its a cheap trick to hit the profits of rivals. But because all firms play the game, it's not the insurers who end up getting stung, but the motorists, who are charged higher premiums for their cover.

The OFT says insurers are paid referral fees of between £250 to £400 per hire car when a replacement is needed. On top of that they appear to encourage the cars to be hired for longer that necessary.

That means the bill for a replacement vehicle soars to £560 more than it needs to. If that's not bad enough, insurers have similar deals in place with repair firms, which adds £155 to the cost of each repair made.

The OFT says some insurers even have agreements with their suppliers to charge higher labour rates when repairing vehicles, so that rivals get hit with bigger bills.

The OFT hasn't named and shamed any insurance companies in this scandal but that's because they all seem to be at it. So it's good that it plans to refer the industry to the Competition Commission.

We must get rid of all these dodgy practices that hit drivers. The only problem is that if the Competition Commission does launch an investigation, it won't be until after October and then it may take up to two years.

We need this sorted out much more quickly. A start would be to ban referral fees from all suppliers. There is a ban on referral fees from lawyers that is due to come into effect from next April. It would be sensible to extend that ban to car hire companies and repair firms.

But it's not been all bad news from motor insurers this week. The AA, Britain's biggest broker, said that any AA-insured driver involved in a collision with an uninsured driver will not suffer loss of their excess or no-claim discount.

This is an important move. It's clearly unfair that an innocent driver should end up paying the penalty of a lost no-claim discount. It can, in some cases, instantly double the cost of cover, which means people who are innocent of fault in an accident, often end up being victims twice over if they are hit by an uninsured driver.

It happens more than you probably realise: around one in 25 drivers on Britain's roads has no insurance. And while innocent motorists will normally have their no-claims discount restored once compensation is paid out by the Motor Insurers' Bureau, there really is no reason for them to suffer financially in the meantime.

Direct Line introduced the concept of an uninsured drivers' promise eight years ago and others have followed. So it's a big cheer that the AA has finally caught up. But all other insurers should follow.

Later in the year the EU gender directive will force insurers to stop offering better deals on the basis of someone's sex. That could increase the cost of all policies. Before then insurers must start to clean up their act and offer decent service.

s.read@independent.co.uk