This is the startling finding of an investigation by the Office of Fair Trading (OFT), which has damned the car insurance market as 'dysfunctional' and provisionally referred it to the Competition Commission for further scrutiny.
Good for consumers
Graham Donoghue, managing director of financial services at MoneySupermarket, said: "The decision by the OFT to refer the private
motor insurance market to the Competition Commission is a positive move for consumers, who have experienced large rises in premiums over the last two years as insurers pass on rising costs of claims to their customers.
"The majority of insurers don't actually make an underwriting profit on the policies they sell. Instead, the industry has tried to rely on revenue from the fees generated from referring personal accident claims to solicitors and elsewhere, inflating repair costs and hire car charges. Ultimately this strategy has come back to hit insurers hard as the cost of claims has risen rapidly - costs that have been passed on to customers."
Currently, after a road traffic accident, the 'at-fault' driver's insurance provider is responsible for meeting the cost of repairs and credit hire replacement vehicles for the not-at-fault driver. However, the OFT believes insurers of at-fault drivers have little control over the way in which these repairs and vehicle replacement services are carried out, or the associated costs.
Feeding the food chain
The problem identified by the OFT is that insurers of not-at-fault drivers, plus others in the food chain such as brokers, credit hire organisations and repairers, take advantage of this lack of control to generate revenues through rebates and referral fees. This is what inflates the costs borne by insurers of at-fault drivers - costs which filter through to the price of motor cover.
The OFT says the market would work better if insurers competed on the quality and value of the service they provide rather than trying to cripple rival insurers with increased costs while at the same time boosting their own revenues.
Breaking down the extra costs
So where do the extra costs originate? The OFT says that, following a typical road traffic accident, the insurer, broker and repairer of the not-at-fault driver pass on that driver's details to credit hire organisations in return for a referral fee, typically of between £250 and £400 a time.
These car hire firms then charge high daily rates and provide the vehicle (which may also be of a higher specification than the driver's actual car) for longer than is necessary.
This leads to a higher bill for the at-fault driver's insurer. The OFT reckons this could amount to £560 for each incident.
The OFT also cited the practice whereby repairers and paint and parts suppliers pay referral fees to insurers for the details of a not-at-fault driver. Having secured the work, they inflate the price of their work to recoup the fee paid, bumping up the cost to the at-fault driver's insurer by an average of £155.
Certain insurers also give the nod to approved repairers to charge higher labour rates when repairing the vehicle of a not-at-fault driver they insure, again leading to higher bills being passed to the at-fault driver's insurer.
In all cases, the OFT believes these increased costs trickle through to higher premiums for all drivers.
John Fingleton, chief executive of the OFT, said: "Competition in this market does not appear to work well for drivers. The focus insurers have on gaining competitive edge through raising their rivals' costs means drivers pay more than they need to for their motor insurance."
No quick fix
But he warned drivers not to expect rapid improvements: "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 OFT is undertaking a consultation process and will reach a final decision on whether to refer to the Competition Commission by October. A spokesman for the Commission said it could take up to two years for its work to be completed. He said the Commission has real teeth and pointed to its demand that banks stop selling payment protection insurance alongside a loan. The Commission also forced BAA to sell two airports to increase competition. It has the power to impose price controls, although this is considered a last resort.
What do insurers say?
The insurers' trade body, the Association of British Insurers (ABI), welcomed the OFT report, saying deep reforms are required across the sector. Nick Starling of the ABI said: "We had called for this. 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, and we hope the Competition Commission will bring in much needed reforms that will result in lower car insurance premiums for consumers."
Louise Ellman MP, chair of the Parliamentary Transport Committee, also welcomed the report: "Like the OFT, we found evidence to support the view that various features of the private motor insurance market prevent, restrict or distort adequate competition in ways that do not deliver a fair deal to motorists.
"I look forward to the Competition Commission driving a process of market reform. However, this investigation will only tackle part of the problem created by the way in which many insurers, claims management firms, solicitors and others exploit every opportunity to generate revenues through referral fees and personal injury claims that inflate the premiums all motorists have to pay."
Shop around for cheap cover
The investigation by the Competition Commission is likely to take time, so it is unlikely consumers will see any fall in premiums in the near future. Instead, people should look to reduce the amount they pay for car insurance by shopping around at renewal and making sure they opt for cover that meets their needs.
Our research shows that drivers using MoneySupermarket's price comparison service to switch car insurance provider save on average £389.
Please note: Any facts were correct at the time of writing the article.
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