Car insurance facing Competition Commission study

Car insurance costs are set to be studied by the Competition Commission, after a provisional referral from the Office of Fair Trading.

The OFT says the industry is "dysfunctional" and artificially adds £255m a year to drivers' premiums.

At the heart of the problem is the system under which repairers and suppliers of courtesy cars are allowed to inflate their charges.

The OFT said this ended up being paid for by drivers.

John Fingleton, chief executive of the OFT, said there was no "quick-fix" for the problem, which is why he wanted the Competition Commission to launch a full in-depth enquiry.

"Competition in this market does not appear to work well for drivers."

The OFT started looking the cost of repairs and the supply of temporary replacement vehicles in September.

This followed the exposure last year of the system of referral fees, under which insurers effectively stoke up claims against themselves - and thus drive up premiums - as a result of selling details of their own policy holders' accidents to solicitors, who then encourage those drivers to sue for damages such as whiplash injury.

In its latest study, the OFT pinpointed the way in which other extra costs, and thus higher premiums, are generated.

It explained that when a claim is made, the insurer of the "at-fault" driver will have to pay for repairs and temporary car hire for the other driver in the accident.

But the suppliers of these services, and their costs, are inflated by the insurer of the "not-at-fault" driver specifying artificially expensive car hire deals and repairs.

This made replacement car hire on average £560 more expensive each time, and made each repair on average £155 more expensive as well, the OFT said.

"Insurers of the not-at-fault driver and others, such as brokers, credit hire organisations and repairers, can take advantage of this lack of control as an opportunity to generate revenues through rebates and referral fees and so inflate the costs of insurers of at-fault drivers," the OFT explained.

"This is an inefficient way for the sector to operate, raising the total costs for providing private motor insurance which drivers end up paying."