Cost of motor insurance to be investigated

The Office of Fair Trading is to investigate the price of motor insurance following news that premiums have gone up by 9% in the first three quarters of this year.

The OFT said in a call for evidence that it wanted to find out what the reasons were for the increase and whether competition or consumer issues were involved. It said that between 2009 and 2010 there had been an increase in premiums of about 12%.

Its investigation will look particularly at third-party vehicle repairs and the cost of replacement vehicles which are given to drivers who have been involved in an accident that was not their fault.

Sonya Branch, the OFT’s senior director of services, said that their suspicions centred around these areas as they believe that companies may be trying to extract money from one another rather than endeavouring to keep premiums as low as possible and provide customers with value for money. She said that by carrying out this investigation the OFT will then be able to decide whether or not a market investigation reference to the Competition Commission would be an appropriate response.

The action taken by the OFT has been welcomed by the British Insurance Brokers’ Association (Biba) which calculates the typical cost of a replacement vehicle arranged through a credit hire company to be in the region of £1,300. Graeme Trudgill, Biba’s technical services manager, said that there had to be a balance between keeping the motorist on the road if at all possible and eradicating the fraud and exaggeration which was to blame for the rising costs.

The OFT added that the costs associated with personal injury claims were a key factor in the rise of premiums, but it said that, with the government already committed to ending what it referred to as the no win, no fee culture, this aspect of motor insurance would not form part of the OFT’s investigation.

The OFT also said that it has asked the Financial Services Authority to investigate the provision of motor legal protection cover to car owners, which is quite often added onto motor insurance at the point of sale. It said it was especially worried about its complexity and that it would make it more difficult for car owners to see whether or not they are getting value for money. It expects to complete its study by the spring of 2012.

The ban on receiving or paying fees for personal injury cases, otherwise known as referral fees, is a recommendation which is part of the Legal Aid, Sentencing and Punishment of Offenders Bill which is currently going through parliament and which, if passed, will become law in October 2012.

The House of Commons Justice Committee has called on the government to extend the ban on referral fees and for it to apply to other types of cases and be punishable by way of a custodial sentence. However ministers have rejected this, saying it will remain a regulatory offence and will only apply to personal injury cases.

The issue of referral fees first came before the House of Commons through a commons motion introduced by Jack Straw, the justice secretary in the last Labour government. The government responded by introducing a partial ban, though the Legal Services Board said that a ban wasn’t justified and that action should instead be focused on targeting rogue elements in the claims farming industry.