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OFT to probe rising cost of motor insurance

The Office of Fair Trading (OFT) is gathering information on the motor insurance industry to find out why the cost of cover has risen so dramatically in the last year.09 Sep 2011

According to the AA's British Insurance Premium Index, the average cost of annual comprehensive car insurance rose by 40.1% in the 12 months ending 31 March 2011.

The OFT wants to find out if this figure is accurate and, if so, the reasons behind the increase and whether there are any consumer or competition issues that need to be addressed.

In a formal Call for Evidence (15-page / 160KB PDF) published yesterday the regulator asked insurers and other market participants for their views on the role played by price comparison websites, the provision of credit hire replacement vehicles, insurers' use of panels of approved repairers and "add-on" products sold in addition to standard insurance cover.

In June this year the Financial Services Authority (FSA) raised concerns that some price comparison websites might be leading customers to inappropriate car and home insurance deals. It is currently consulting on proposed guidance for website operators to ensure they are treating customers fairly.

Insurers have been asked to answer specific questions on whether there are greater risk or regulatory factors in parts of the UK that affect car insurance prices, and whether there are "other factors" surrounding the demographics of consumers, such as younger drivers, that result in higher premiums for all.

The OFT's findings will be published in December 2011 and may lead to further investigation of the motor insurance sector. The options open to the OFT include carrying out a more detailed market study, consumer or competition enforcement action and/or seeking voluntary action from the industry. It may also consider referring the market to the Competition Commission.

The OFT is also seeking "to understand the reasons" why it appears car insurance premiums are "significantly higher" in Northern Ireland than elsewhere in the UK. Last week the Consumer Council in Northern Ireland asked the OFT to "examine the car insurance market" in the country as it launched a campaign to reduce the costs for consumers.

Other stakeholders in the car insurance market, including price comparison website operators, replacement car service providers and vehicle repairers are also asked for information about their roles and thoughts on the cost of car insurance.

One aspect the OFT will not cover, however, is the rising cost of personal injury claims which has a knock-on effect on the insurance premiums consumers are being asked to pay.

This issue is being addressed by the Government in the Legal Aid, Sentencing and Punishment of Offenders Bill (also known as the Justice Bill) as part of its scheme for reforming the way civil actions are funded.

The Ministry of Justice (MoJ) is also consulting on proposals to widen fixed legal costs regime in county courts for low value road traffic accident claims involving personal injury.

A related issue is that of referral fees - payments made to or by claimant solicitors and others in the claims management chain for the referral or introduction of potential clients.

The Association of British Insurers (ABI) maintains that referral fees increase costs, encourage bad behaviour and provide no added value for consumers. It is lobbying for the practice to be banned, but the MoJ has not yet confirmed its position.