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Car insurance industry faces two year OFT investigationBack

The Office of Fair Trading (OFT) has made a decision to refer the UK’s private car insurance industry to the Competition Commission for further investigation among fears that it is not proving to be a reliable service for motorists.

Earlier this year, the OFT produced findings which suggested that insurers of drivers who were responsible for accidents possessed very little control over the way repairs and replacement vehicles were provided to the not-at-fault drivers, creating an opportunity for insurers to inflate their costs by as much as £225 million per year.

Having provisionally decided to refer the industry to the Competition Commission in May, the private motor insurance industry which is worth an estimated £9.4 billion in the UK is accused by the OFT of potentially ramping up premiums by around £10 per policy.

In May, the OFT found the motor insurance market to be “dysfunctional”, with signs that insurers of at-fault drivers were being taken advantage of by the firms who cover of not-at-fault drivers and others involved in providing repairs and best car rental services. It found that replacement vehicle costs were being inflated by an average of £560 and repairs by £155 more.

The OFT explained that after a road incident, many insurers of not-at-fault drivers, brokers and repairers refer at-fault drivers to organisations that tend to charge higher rates, meaning that the insurers can pocket referral fees of up to £400 per hire car.

In response to these findings, the OFT has said there is “no quick fix” to the problems and that further investigation is needed. The Commission now has up to two years to report further findings, and if it decides that the competition is harmful then it can take measures to address the situation.

Clive Maxwell, chief executive of the OFT, said: “Competition appears not to be working effectively in the private motor insurance market. The insurers of at-fault drivers appear to have little control over the bills they must pay, and this may be leading to higher costs for them and ultimately higher premiums for motorists.”

The BVRLA, the UK Trade body for companies engaged in the leasing and rental of cars and commercial vehicles has welcomed the OFT’s decision as it believes the increasing cost of compulsory motor insurance is the biggest threat to the profitability and sustainability of the vehicle rental industry.

“It is disappointing that politicians and the OFT have had to get involved to improve the competition in the sector, which could have got its own in house order,” said the association’s chief executive, John Lewis.

“We believe insurance companies should take greater control of vehicle downtime and costs to manage claims effectively. A credit hire organisation will simply provide a car for as long as one is needed to help the not-at-fault car owner. One solution could be to provide a courtesy car as standard for all policy holders.”

Posted by Leana Kell on 02/10/2012