News

The car insurance industry is one of a very few markets that is important to the vast majority of us. For the past few years the industry has been under the spotlight as prices have increased at a drastic rate. The previous focus has been on fraudulent claims and the cost of claim referral fees however now the focus is on internal claims practices.

The Office of Fair Trading (OFT) has been reviewing the internal claims processes and has highlighted some key practices that are adding to drivers premiums. The OFT have worked out that the cost of these practices is adding around £225m to the annual cost of drivers premiums. Because of the severity of these costs the OFT has referred the industry to the Competition Commission.  So what are the practices in question?

On the surface these processes sound very complicated and include phrases such as “at fault” and “not at fault” insurers. So to make it easier here are the meanings of these two phrases-

1)      At Fault Insurer- This phrase refers to the insurance company of the driver that was at fault in an accident.

2)      Not at Fault Insurer- This phrase refers to the insurance company of the driver that was not at fault and therefore the injured party.

The OFT has identified that the problem occurs after an accident has happened and the claim is with the insurers. The normal course of action is that the insurance company of the at fault driver (the at fault insurer) would pay for the repairs and any associated cost of the injured party (the not at fault insurer). However the OFT has identified that the not at fault insurance company is then using this situation to inflate costs. Pre-arranged deals are set with garages and car hire companies that are way above the market rate, for each car that is hired or fixed the not at fault insurer will receive a referral fee.

The OFT has provided some initial estimates of the inflated cost which indicate that car hire is approximately £560 more expensive for each vehicle and garage costs are approximately £155 more expensive. This is huge increase on the current market rates and is pushing up premium costs.

The effect on car insurance premiums comes when the at fault insurer is forced to pass on these costs to customers through their annual premiums. This is where the OFT feels that the industry should be passed to the Competition Commission. The OFT feels that consumers are worse off because of this situation and that a full independent review should be undertaken.