Car insurance probe broadens bid to limit referral fees, says Fitch

A provisional decision to refer the car insurance market to the Competition Commission broadens a push to limit referral fees, ratings agency Fitch believes.

The Office of Fair Trading's decision followed an investigation that found insurers of not-at-fault drivers generate revenue through rebates and referral fees from vehicle repair and hire companies.

These fees can then inflate the bills sent to the insurers of at-fault drivers in an accident, pushing up total premiums for drivers by around GBP225mn a year, according to the OFT.

Fitch says that while the additional cost to car insurance premiums is much smaller than that associated with personal injury claims, for which insurers also receive referral fees, the trend is the same: once one insurer starts making referrals it pushes up costs for rivals, creating an incentive for other insurers to go down the same route, even though it pushes up costs and reduces consumer trust in the sector as a whole.

The OFT investigation follows a January proposal by MPs on the Transport Select Committee to ban all referral fees.

Fitch says: "We said at the time that a ban would be positive for the car insurance industry because it would help to curtail the 'claims-encouragement' industries that have emerged in recent years.

"It would also potentially bolster insurers' own efforts to combat the rising costs of settling bodily injury claims and fraudulent claims, about which we have been sceptical in the past.

"We believe the focus on referral fees also reflects a political will to try and cut insurance costs for motorists as they are faced with fuel prices that have risen nearly 50% over the last three years.

"Our outlook for the UK non-life insurance sector in 2012 is stable, reflecting our expectation that its capitalisation, underwriting and operating trends will generally support the ratings.

"We continue to believe motor insurers that counter claims-encouragement through tighter underwriting terms and superior claims management will hold an advantage over competitors that focus solely on pricing."

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