A reference to the Competition Commission is on the cards

With the latest revelations about Barclays and other banks lying to manipulate the LIBOR, and the HSBC at the centre of money laundering activities in America, we’re used to the idea of the banking sector ripping us off. But we somehow tend to think the rest of our capitalist business community works more fairly. As if! With G4S coving itself with glory over providing security to the Olympics and the newspapers hacking into our computers and voicemail, it can hardly come as a surprise the insurance sector is also not working properly and denying us cheap car insurance.

In June, the Office of Fair Trading announced a provisional decision to refer the British insurance industry to the Competition Commission. Although the final decision is delayed until October, we can be hopeful this is now a formality. The OFT accused the industry of being dysfunctional and costing drivers an estimated 225 million pounds a year in additional premium payments. The way the scam works is that, when we have an accident, the insurers refer us to garages to make the repairs, or sell or rent us replacement vehicles. The insurance companies receive a percentage fee for each referral. This is reflected in the price the insurers pay these garages for repairs or car hire companies for replacement vehicles. The sale prices of replacement vehicles can be inflated or the period of hire can be recorded as longer than that actually enjoyed. The result? Whether you are the at-fault driver or the victim, everyone’s premiums rise. In each insurance company’s accounts, the payments made on your behalf to repair or replace are described as a cost, but a percentage is actually a concealed profit element for delivering the service the insurers are already contracted to deliver.

The experts expect the Commission to ban the insurers from continuing to add these referral fees. It’s not clear whether this will produce cheap car insurance. Since some insurers make most of their profit from these fees, the stock market valuation of the companies affected has fallen. Perhaps appropriately, one of the companies most affected is Direct Line. This has been preparing to float on the stock exchange. Perhaps it will now delay. Ironically, Direct Line is owned by the RBS Bank so you can see where the culture to rip off customers comes from.