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The UK motor insurance market is set for a full-blown anti-trust investigation after the consumer and competition watchdog said its “dysfunctional” nature was pushing up premiums by as much as £225m a year.
The Office of Fair Trading said it planned to refer the market to the Competition Commission as insurers’ relationships with vehicle hire and repair companies may “prevent, restrict or distort competition.”
Regulators are concerned about the incentives insurance companies have when their policyholders are involved in accidents for which they are not to blame because the costs will be borne by insurance industry rivals.
Credit hire companies provide temporary cars to drivers involved in accidents for which they were not responsible. They are then able to claim against the insurance company of the driver to blame.
“Not-at-fault drivers appear to receive replacement vehicles for longer periods than necessary, leading to inflated bills for the at-fault driver’s insurer to cover,” the OFT said.
The cost of replacement vehicles provided to not-at-fault drivers was on average £560 more expensive than normal market rates, it added.
In exchange for referring customers to the credit hire organisations, insurers and other parties such as brokers receive a referral fee of between £250 and £400 per car hire.
The OFT found similar problems in insurers’ relationships with paint suppliers and parts suppliers. Some insurers have agreements with approved repairers to charge higher labour rates, for example.
John Fingleton, chief executive of the OFT, said: “Competition in this market does not appear to work well for drivers.”
However, he warned: “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 said it expected by October to reach a final decision on whether to refer the matter to the Competition Commission.
The motor insurance market has already been under intense regulatory and political scrutiny in recent months but so far much of the focus has been on personal injury claims.
The government plans to ban the fees insurers collect for putting their customers in touch with personal injury lawyers, for example.