James Moore: Insurers cost drivers and themselves money with their own incompetence

Outlook Who to believe? The Office of Fair Trading lambasted motor insurers yesterday for overcharging customers to the tune of £225m. But just a day earlier Investec's insurance analyst produced a report calling the industry "inherently unprofitable" and advising clients to sell Admiral, a notable exception until the wheels started to fall off last year.

Could it be that someone's numbers don't add up?

Right-wing critics, who believe that trade should be free but not fair, will point to the OFT. They'll accuse the watchdog's "communist staff" of unjustly squeezing the industry. What else should one expect from an organisation whose chief economist was once the lead singer of, ahem, Talulah Gosh, an indie band popular in the late 1980s with a certain type of floppy-fringed student.

Left-wing critics will beg to differ, suggesting that the problem lies with the worthy analyst's analysis, which they will probably see as typically City. Just look at the way premiums have been soaring, they'll say. The consumer is clearly being ripped off because of profiteering.

Actually the OFT, floppy fringes and all, and Investec's analyst are both right.

Premiums are up and profits down for the same reason: the ballooning cost of dealing with accidents.

In recent months the finger has been pointed at the rise in allegedly false whiplash-related compensation claims. That, however, is a sideshow. Unnecessary costs start ticking up as soon as the mangled wreckage has been towed from the scene of a smash.

Insurers for the victims rack them up by using favoured credit hire companies to supply courtesy cars (often for longer than necessary), favoured garages to handle repairs (at inflated costs) and favoured lawyers to handle those compo claims (ditto). No control is exerted because everything can be recovered from the guilty party's insurers.

It doesn't seem to matter to those victims' insurers that they could be on the other side of this process through insuring an at-fault driver two miles down the road. Quite often they'll actually be on both sides of the same smash. With no discernable impact on those costs.

The lack of profitability identified by Investec and the overcharging by the OFT is caused by the same thing: the incompetence of the people who run insurance companies. Sadly, it will take more than the OFT's provisional referral to the Competition Commission to fix that.

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