Car insurance rip-off

The Office of Fair Trading thinks our car insurance policies could be a rip-off, so it is to conduct a market study and might refer the whole business to the Competition Commission. Why?

Well, the main reason is that the cost of paying for injuries sustained in accidents has rocketed. But these personal injury claims are being looked at by the Ministry of Justice, so the OFT is bypassing that issue.

Almost as important, though, says the OFT, is the effective scam that appears to operate over hire cars and repairs.

This is how it works. You cause an accident, so the victim makes a claim, has to have a hire car and has to get his car repaired. Fair enough.

What the OFT is saying is that your insurer might receive a bill for a hire car which is three times the actual cost of hiring one. Specifically, between £1,200 and £1,500, rather than between £400 and £600.

The heart of this problem, we are told, is the credit hire company. It is a business which exists to serve the needs of accident victims who don't have an insurance policy which promises a hire car. The victim might have third party cover only, or a comprehensive policy which doesn't have that element.

The credit hire company pays a fee to insurers, brokers, or solicitors to refer victims on - it's known as a referral fee.

It provides a hire car to the victim, free of charge, knowing that it will be able to send the bill to the insurance company which is covering the driver who caused the accident.

It's a neat little business. The OFT is worried that insurers have no control over these escalating costs.

Worse than that, insurers are part of the problem, because they collect referral fees. Also, when they act for an accident victim who has cover for both car hire and repairs, the OFT suggests that they have little incentive to keep down the cost.

They simply pass on a whopping bill to the at-fault insurer, knowing that it will have to be paid.

It's enough to make drivers seethe, knowing that a whole industry is profiting from inflated insurance costs.

But there is some more encouraging news from the Office of Fair Trading. It says that while motor insurance premiums have risen sharply, by 12% between 2009 and 2010 and a further 9% this year, the increase is less than half that recorded by the AA and price comparison websites which analyse insurance quotes.

The reason is that drivers coming to renew their insurance are suffering smaller increases than than those asking for a new quote.

Most drivers who renew policies are older and more experienced. Many of those shopping around for new policies are younger and less experienced.

If they've just passed the test they may not find insurance they can afford at all, but the quotes are still recorded.

So, bad as the situation is with car insurance, the OFT is suggesting that it isn't quite as horrendous as it has been painted.