Competition Enquiry for Car insurance Market

The Office of Fair Trading (OFT) believe that insurance premium increases between 2009 and 2010 of 12% and during the first three quarters of 2011 by 9% were partly as a result of insurance companies inflating costs of the provision of replacement vehicles for policy holders. This is perhaps a good reason to compare car insurance premiums by going onto a car insurance comparison website.

Car insurance companies are forking out up to £400 as a referral fee to credit hire firms and claw back these funds by way of charging the policy holder more in premiums.

The Competition Commission are to be contacted by The Office of Fair Trading who will refer the car insurance market to them as £225m extra in insurance premiums each year is being paid by drivers due to the insurance companies inflating the cost of hire vehicles and repairs.

The OFT came to the conclusion that a major part of the increase was because of insurance companies deciding to inflate costs for replacement vehicles to drivers who were deemed to be not at fault at an accident. Some of these cases saw the cost at over £1,000 more than the going rate.

The Chief Executive of the Office of Fair Trading, John Fingleton, said:”Competition in this market does not appear to work well for drivers. We believe 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.

“Because insurers are distracted from competing primarily on the quality and value of service provided to insured drivers, incentives for greater efficiency may be reduced.”

This announcement comes after the OFT spent a three-month long period gathering evidence after an earlier enquiry came to the conclusion that drivers were overcharged.

The OFT found out that the insurance companies of drivers who were not at fault following an accident had an average of £560 added towards the cost of replacing a car in a typical period of hire.

Typically insurers may also benefit by receiving £155 as a referral fee from parts and paint suppliers and repairers with those funds being re-imbursed by way of greater repair costs.

As these costs are being past to the at – fault driver’s insurance company this results in an across the board increase in car insurance premiums for drivers.

Fingleton stated:”There does not appear to be an appropriate, quick fix to these problems. We have provisionally decided that a more in-depth investigation by the Competition Commission, which has a range of additional tools at its disposal, may be necessary.”

The Association of British Insurers welcomed the announcement by the OFT with Nick Starling who is the Director of General Insurance at the ABI stating: “For too long insurers have faced inflated rates for credit hire cars and excessive hire periods which have led to higher insurance premiums for customers. Regulation of all players in the market to tackle excessive costs is needed.”

The Credit Hire Organisation represents the credit hire industry. They dismissed the findings of the OFT believing that the increase in premiums was mainly due to a huge increase in whiplash injury claims.

In October 2012 the OFT will release its final decision with a subsequent enquiry by the Competition Commission likely to take another two years.