Office of Fair Trading labels private motor insurance market dysfunctional

The Office of Fair Trading (OFT) has provisionally referred the private motor insurance market to the Competition Commission after finding evidence that its conduct pushes driver's premiums up by £225 million a year.

It found evidence that the insurers of at-fault drivers have little control over the costs of vehicle replacements and repairs for the other party, despite them being legally responsible for meeting the costs.

It accused the insurers of not-at-fault drivers of taking advantage of this lack of control in order to generate revenue. In some instances it found that insurers were convening with garages and car hire suppliers to charge artificial prices that in turn inflate the costs of driver's premiums.

According to the OFT, some insurers were referring drivers of road traffic accidents to credit hire organisations who tended to charge significantly higher daily hire rates in exchange for referral fees. Such practices, as well as replacement vehicles being hired for longer than necessary, were found to inflate the costs of car hire by an average of £560.

In a statement the OFT said this was an 'inefficient way for the sector to operate.'

Chief executive of the OFT, John Fingleton, said: "Competition in this market does not appear to work well for drivers. We believe the focus that insurers have on gaining the competitive edge through raising their rivals' costs means that drivers pay more than they need to for their motor insurance policies."

It is to refer the private motor insurance market to the Competition Commission after saying it has 'reasonable grounds' that such behaviour was restricting and distorting competition.

According to the OFT, the market would benefit if insurers focused on the 'quality and value' of its service, rather than 'gaining the competitive edge through raising rival insurers' costs and increasing their own revenues.'

Mr Fingleton continued: "Because insurers are distracted from competing primarily on the quality and value of service provided to insured drivers, incentives for greater efficiency may be reduced.

"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."