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Car insurers face probe on premiums

Car insurers are facing a full-blown inquiry over claims that their "dysfunctional" practices pushed up premiums by £225 million a year.

The Office of Fair Trading (OFT) plans to refer the market to the Competition Commission after finding evidence that the cost of replacement car hire and repairs in the wake of accidents was artificially high.

It said insurers of at-fault drivers were powerless over the way in which repairs are carried out, leaving them at the mercy of the other party.

This system, which the OFT described as dysfunctional, inflates the cost of providing replacement vehicles by an average of £560 a time, while the cost of repairs were £155 more.

Consumer groups welcomed the announcement as drivers have been hammered by soaring premiums and complex charges for the same or even fewer benefits in return.

Which? executive director Richard Lloyd said: "The Office of Fair Trading found a pattern of complicated fees and charges so we want to see greater transparency and pressure on insurers to reduce prices."

The OFT believes the market would work better if insurers concentrated on the quality and service they provide to drivers, rather than trying to gain the competitive edge by raising rivals' costs and boosting their own revenues, although it warned there will be no "quick fix".

It will reach a final decision on whether to refer the matter by October, following a consultation. The Commission has powers to restructure markets and to make firms sign up to commitments and sell products in a certain way.

The OFT said after crashes, some insurers of not-at-fault drivers refer them to organisations that charge higher rates in exchange for referral fees of up to £400 per hire car and replacement vehicles are sometimes given for longer than necessary.

When it comes to repairs, bills paid by the insurers of at-fault drivers are pushed up because some insurers receive referral fees and rebates from repairers and suppliers. Some insurers even have agreements with repairers to charge higher labour rates when repairing the vehicle of the not-at-fault driver.

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