The pricing and policies for car insurance could undergo major changes after a report by the Office of Fair Trading condemned the market as "dysfunctional".
An investigative report published today by the Office of Fair Trading (OFT) said it found reasons to suspect that certain actions in the current private motor insurance market was leading to unnecessary inflation of prices for premiums, leading to distortion of the competition.
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Consequently the OFT has made a provisional decision to refer the matter to the Competition Commission, which has powers to enforce changes in the motor insurance industry. The final decision on this matter will be confirmed on October 2012.
The report found that the price of motor insurance premiums increased by 12 per cent between 2009 and 2010, and then a further 9 per cent in the first three quarters of 2011.
The OFT now calculates that compared to three years ago the UK's drivers have started paying an extra £225 million a year for their car insurance.
It also concludes that this dramatic rise in cost has been created by insurers who artificially inflate the price of providing replacement vehicles to drivers involved in accidents that weren't their fault.
The OFT found that on average insurers were charging an extra £560 to the cost of a replacement car when compared to a typical rental period.
As a result the OFT's report found that insurers should focus less on pushing rival's prices and instead on the quality and value of their own service to customers.
"It appears the OFT have concerns that the process in which insurance companies operate is resulting in increased premiums for insurers," said regulatory lawyer Derek Millard-Smith.
"There is clearly a fear that after a road traffic accident an at-fault party loses control as regards the repair and hire costs of the not at fault party. The inference is that insurance companies are using preferred repair/hire companies who pay the insurers a fee for referral of work but charge at higher rates.
"The overall impact is that repair and hire costs are higher than they should be, and it is the consumer who picks up the bill for this by virtue of increased premiums," said Millard-Smith, who specialises in motoring law.
"At present, the decision to refer insurance companies to the Competition Commission is only provisional, but should a review eventually take place, the overall result may be lower premiums for consumers."
Today's announcement by the OFT to refer their case to the Competition Commision has attracted widespread support from various motoring organisations in Britain.
The executive director of Which?, Richard Lloyd, also backed the OfT report, commenting that an investigation by the Competition Commission would "put an end to bad practices and give consumers a better deal on their car insurance."
The managing director of Retail Motoring Law, Andrew Moody, said: "It is the right decision given the shocking evidence and the move comes as no surprise to me."
The OFT has received some criticism however. The Credit Hire Organisation (CHO) said the report's findings represented just 2 per cent of the car insurance industry's total spending, which is currently estimated at £13 billion a year.
The CHO argues that the hike in insurance premiums was primarily down to the number of claims for whiplash, which are estimated to cost the insurance industry £2 billion every year.
You can read our guide on how whiplash claims and other scams are allowing other people to ramp up the cost of your motor insurance.