Government officials are to ask the Competition Commission to investigate the car-insurance market over fears that motor premiums are being unnecessarily inflated.
The Office of Fair Trading (OFT) said it had provisionally decided to refer insurers to the commission after its own study found that “dysfunctional” competition between providers was adding around £225 million a year to policy costs.
High service costs
The OFT said the crux of the problem was that the insurers of at-fault drivers, which have to foot the bills for repairs and temporary car hire for no-fault drivers, had no say in arranging those services.
The watchdog found that the insurers of no-fault drivers ended up arranging artificially expensive car-hire deals and repair work.
Garages and car-hire firms would often pay these insurers fees to guarantee a stream of work.
‘£560 added to car-hire bill’
The OFT said that, on average, this arrangement led to car-hire costs being £560 more expensive than necessary each time a vehicle was needed. An estimated £155 was added to the cost of each repair.
Its study also found that no-fault drivers were frequently given hire cars for longer than they needed.
These extra costs inevitably filtered through to motor premiums, the OFT said.
The OFT’s chief executive, 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.
Lack of incentives
Fingleton added that there were a lack of incentives for the insurers of no-fault drivers to push down the cost of services such as repair work and car hire.
“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 has now asked for parties involved in the car-insurance market to comment on its findings. It will make a final decision on whether to refer the matter to the Competition Commission by October this year.
The commission has the power to order firms to change their practices if they are found to be acting against the consumer interest. It can also impose fines and other sanctions.