OFT launches investigation into motor insurance industry

Office of Fair Trading to focus on replacement vehicle and repair costs and referral fees following steep rise in premiums.

The Office of Fair Trading (OFT) has launched an investigation into the high cost of motor insurance.

It has been collecting evidence as prices have continued to rise, with some estimates putting the annual increase as high as 40%. The OFT claims that its research found that premiums had increased by 12% between 2009 and 2010 and by a further 9% in the first nine months of this year.

The OFT says that it is going to look at two areas in particular that it believes “restrict and distort competition”.

The first is the cost to insurers of third party claims for replacement vehicles and repairs. It says insurers “appear to find it difficult to assess the extent to which the costs claimed are reasonable”.

The second is the practice of referral fees, with insurers, roadside assistance companies and garages all cited for selling off drivers’ details to claims management companies. They then often advise drivers to pursue claims for injuries such as whiplash, which are difficult to prove. If the other party’s insurer loses, they have to pay compensation plus legal costs for both parties.

The OFT says the average referral fee is £800. And whiplash claims now account for 70% of all personal injury claims.

The Government announced in September that it would ban referral fees in England and Wales and this is likely to be passed in the spring of next year. However, there are concerns this won’t work in practice unless it’s rigorously policed.

The OFT has also called on the Financial Services Authority (FSA) to work with insurers to simplify insurance product information.

The results of the OFT investigation are due in spring 2012. It has the power to refer the industry to the Competition Commission if it believes there are unfair practices taking place.

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