The car insurance market will be investigated by the Competition Commission, the Office of Fair Trading (OFT) announced today.
The OFT referred the 9.4 billion private motor insurance industry to the Commission after a market study identified evidence of anti-competitiveness and spiralling costs for insurance companies and consumers.
The OFT is concerned that insurers of drivers responsible for an accident arent in control of the way repairs and replacement vehicles are provided to the 'not-at-fault' driver, or how much they pay out for them.
This gives the insurer of the innocent party the opportunity and incentive to gain a competitive advantage over rivals by driving up their costs costs that are then passed on to the consumer in higher insurance premiums.
The OFT found that the consumer detriment caused by inflated courtesy car costs (up to 560 more expensive when supplied by a credit hire firm), parts and paint was 255 million a year, adding 10 to every car insurance policy.
Thats on top of the extra 90 motorists have to fork out to cover the cost of bogus personal injury claims.
Unscrupulous practices of credit hire companies, accident management firms, brokers, parts and paint suppliers and insurance companies pursuing claims against at fault drivers will be scrutinised.
Clive Maxwell, OFT chief, said: 'Competition appears not to be working effectively in the private motor insurance market. Insurers appear to have little control over the bills they must pay, and this may be leading to higher costs for them and ultimately higher premiums for motorists.
'Having publicly consulted on our provisional decision, we are still of the view that there is no quick fix to these problems, and that a more in-depth investigation by the Competition Commission is appropriate.'
Nick Starling, the Association of British Insurers' director of general insurance, welcomed the news. The OFT found what insurers have known for years, he said. That when a customer has a crash that is their fault, the insurer has little control over the cost of the subsequent claim. In particular, for too long insurers have faced inflated rates for credit hire cars and excessive hire periods.
Graham Threlfall, head of the National Association of Bodyshops (NAB), agreed, but cautioned against Government regulation. The average cost of repair is 1150 and that hasnt really changed in the past few years. Considering new technology, materials and repair methods, were doing a good job.
The problem is the overall cost of claims, which includes things like replacement vehicle and personal injury costs. Its good the OFT has recognised that, but the insurance sector should be allowed to put its own house in order through self-regulation.
The NAB will use the investigation to call for a self-policing industry watchdog with the power to impose fines and other penalties on companies that act anti-competitively.
The Competition Commission has up to two years to report its findings. It has powers to impose remedies to address the situation.