David Prosser: How motor insurers drove premiums toan all-time high

Outlook There will be plenty of motorists who welcome the launch by the Office of Fair Trading of an inquiry into the car insurance trade. After all, figures from the AA reveal the average cost of cover is now 30 per cent higher than a year ago. It is just a pity the inquiry will not consider the impact of personal injury claims – for while these are now the subject of a separate Ministry of Justice inquiry, this racket lies at the heart of premium inflation. Moreover, the insurers themselves are up to their necks in it.

The insurance industry's response to complaints about rising premiums, repeated by the Association of British Insurers yesterday, is always the same: "rising claims costs from personal injury claims" head the list of factors driving up the price of insuring a car.

So why are personal injury claims becoming ever-morecommon? Well, anecdotal evidence suggests Britain generally is becoming more litigious so that may be part of it. A more fundamental reason is that personal injury lawyers have developed impressive networks to identify accident victims who might be potential clients. And guess which industry is receiving several billion pounds a year in referral fees for passing on victims' details to such lawyers? Step forward motor insurers.

Referral fees are the insurance industry's dirty little secret. If you have a car accident that requires you to notify your insurer, there is a very good chance it will sell the details of your case to a personal injury lawyer. As a result, personal injury claims are rising as the ABI says – but while those costs are passed on to customers, insurers are pocketing fat referral fees. Nor does the legal racket end there. Almost every car insurance policy these days includes legal expenses cover, which provides drivers with access to a solicitor should they require one. It's the insurer that gets to choose the solicitor, of course, and naturally it takes fees from the firms to which it sends business.

Then there's the courtesy car scam (which it looks as if the OFT will be considering). Free use of a replacement car while yours is being fixed is a useful policy feature – but it's not really free. In fact, the car will come from a hire company selected by your insurer: again, it requires payment forputting business the way of the car hire outfit, and the size of the supplier's rental charges will certainly not feature high on the list of criteria for its selection.

With almost all insurers up to these tricks, it's very difficult for individual firms to take a stand, since they still have to pay everyone else's costs when they're on the wrong end of a claim. The result has been steep increases in premiums across the board – even before the other factors that are blamed by insurers, such as uninsured drivers, come into play.