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The car insurance market is 'dysfunctional' – I know from my own experience
Amid rising car insurance premiums, Lorna Bourke is worried by the slow pace of reform.
by Lorna Bourke on Oct 03, 2012 at 09:32
The only surprise about the recent announcement of an investigation by the Competition Commission into motor insurance is that it has taken the authorities so long to recognise that Britain’s 23 million car owners are being ripped off to the tune of many millions of pounds every year.
The OFT’s main concern is that when there has been an accident the insurer of the ‘at fault’ driver has little, if any, control over the way repairs and replacement vehicles are provided to the ‘not at fault’ driver. As a result, insurers of the 'not at fault’ driver, credit-hire organisations and repairers are able to engage in practices that inflate their costs higher than they might otherwise be.
The Association of British Insurers (ABI) said that it welcomes the inquiry and that ‘much needed reforms’ are necessary. But if that’s the case, why didn’t the ABI do something about this blatant abuse of motorists years ago? ‘The OFT found what insurers have known for years – that when a customer has a crash that is their fault, the insurer has little control over the cost of the subsequent claim,’ said Nick Starling, director of general insurance at the ABI.
This is nonsense. Most insurers have ‘approved’ repairers with whom they agree rates for repair work and it is the insurer's fault if they are being overcharged – which they often are. There has already been huge publicity for the rip offs that have occurred over ‘replacement’ cars with car hire firms charging clearly extortionate rates. To date the insurers seem to have done little or nothing about these scams – and it is difficult to understand why since they all push up the cost of claims.
The cost of repairs and replacement vehicles to not-at-fault drivers alone amounts to about £1.4 billion a year. With policyholders ultimately footing the bill for these excessive costs, there has been no incentive – and certainly no will on the part of insurers – to clean up the situation.
Ban on referral fees
The ABI says it called for an across-the-board ban on referral fees – the controversial fees paid by solicitors to claims management companies and insurance firms for personal injury details – together with the introduction of fixed legal costs over a year ago. ‘Even if we wanted to we could not get all insurers to stop referral fees as it would be against competition law,’ says Malcolm Tarling, a spokesman for the ABI. ‘And others would continue the practice such as some garages and solicitors – whom we have no power to tell to stop. This is why we called for a blanket ban, and why the government plans to introduce such a ban.’
Tarling points out that not all insurers accept referral fees. ‘Those who do would argue that if they did not get some income in this way, their claims costs in dealing with claims from those firms who do (accept referral fees) would be even higher,’ says Tarling.
The problem is widespread and probably does need government action rather than a voluntary agreement amongst insurers, even if one could be made to stick. The OFT found that mechanics, brokers, credit hire organisations and others can ramp up their income through rebates and referral fees making the market, ‘dysfunctional’.
There was evidence that some insurers took referral fees of up to £400 a time for using favoured repairers and hire companies. The OFT said the practices resulted in the average repair bill being £155 more than it should be and the cost of replacing a vehicle costs on average £560 more than it should, resulting in higher insurance premiums averaging £10 a year for all motorists.
Overpriced repairs: my experience
This is probably a significant underestimate if my own experience is anything to go by. A few weeks ago someone drove into the back of me at speed. I was stationary in a queue of cars at traffic lights on the A303. The car which hit me was a write off but my car was largely undamaged because I have a tow-bar on the back which took the full force of the impact. Luckily, nobody was injured.
The car owner’s insurers, Quote Me Happy, accepted 100% liability but wanted to write off my car because their approved repairer, Nationwide Crash Repair Centres, said it would cost over £1,000 to replace the bent tow bar and the scratched plastic bumper underneath. We eventually settled on a payout of £800 and I kept the car – which was probably worth only £1,500 – but had suffered only minimal damage. However, the same ‘authorised’ repair garage replaced the tow bar, and knocked out the dent in the floor of the boot for £272.40!
Contrary to popular belief, car insurance fraud isn't just car owners exaggerating claims for ‘whiplash’ or deliberately crashing cars. Garages, car hire firms and the insurers themselves are as much to blame for excessive costs as individuals. But why do the insurers put up with this?
Whatever the cause, there is no doubt that motor premiums have been rising. Figures from the AA show that in July of this year car insurance hit the £1,000 barrier for the first time after an massive increase in bogus whiplash and ‘cash for crash’ claims. The average fully comprehensive car insurance now costs £1,034 – up 8.5% on last year’s figure of £955. What is alarming is that it more than doubled in just four years from July 2008 when the average fully comprehensive policy cost just £509, according to the AA British Insurance Premium Index.
But don’t hold your breath for any reductions in car insurance premiums in the foreseeable future. The Competition Commission has up to two years to report its findings. Given the work that has already been undertaken by the OFT one might have thought the government would simply implement a referral fees ban more or less immediately.
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