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AA says average comprehensive premiums up by 40%, with young drivers now typically paying more than £2,400 a year
Soaring car insurance premiums are to be investigated by the Office of Fair Trading (OFT) in an attempt to establish whether drivers are being overcharged.
The average car insurance premium for comprehensive cover rose by 40% in the 12 months to March, according to the AA. Younger drivers have been hit particularly hard, with those aged 17-22 paying a typical premium of £2,431, up 64% in a year.
The consumer watchdog has issued a "call for evidence" as it looks to establish if any competition or consumer issues need to be addressed and examines the role of price comparison websites. Particular focus will be given to reports suggesting premiums are significantly higher in Northern Ireland than the rest of the UK.
Insurers say a number of factors have contributed to the rises, including an increase in fraud and a huge rise in the number of personal injury claims.
"If you have an accident in a car, you are now encouraged by all sorts of different people to make a claim against the other party," said Graeme Trudgill, head of corporate affairs at the British Insurance Brokers Association. "When you have such a massive increase in claims, insurance companies are going to have to put their rates up."
Otto Thoresen, the director general of the Association of British Insurers, defended the industry and said the OFT investigation was an opportunity to highlight the cost pressures motor insurers are facing. "The motor insurance industry has not been profitable for the last 16 years," he said.
In June, Labour MP Jack Straw criticised insurance firms for selling the details of car accidents to personal injury lawyers – a business estimated to be worth £3bn a year. The practice is supported by the sale of legal expenses cover as an add-on to car insurance policies. Straw said the "racket" should be banned.
The OFT said a full inquiry could be held if issues were found. It has the power to refer the industry to the Financial Services Authority, but the OFT could look for voluntary action from insurance companies to fix any problems it finds.
Dan Moore, senior researcher at Which?, said: "It's about time the OFT looked into this. It is important that the insurance industry does not take advantage of the fact that it is a legal requirement to have motor insurance by charging whatever they like. I am not convinced the industry is working hard enough to help new drivers get affordable insurance. Insurers do not seem to care about their customers. They want to get them in on a cheaper deal for a year and then just keep upping their premiums after that."
As well as price comparison sites, the OFT said it had identified a number of areas that may raise competition or consumer issues. These include the provision of replacement vehicles to drivers who are involved in accidents that are not their fault; insurance companies' use of panels of approved repairers; and additional products that are sold by insurance companies.
An investigation into motor insurance premiums is already being carried out by the Commons transport select committee, which published its initial findings in March. It will be calling for further evidence in coming months.
Simon Douglas, director of insurance at the AA, said he believed the insurance market was functioning in a normal manner and that prices had to rise. He compared it to the gas market where householders have also seen prices rocket.
"The gas companies have been experiencing higher supply costs and the insurance companies have been experiencing higher claims costs," he said. "Everyone holds off putting up their prices for as long as they can but when one goes they all do – and that's why it might seem like collusion, but it isn't."
He said he expected any premium rises in the AA's next instalment of the British Insurance Premium Index to be much smaller, and that prices from some companies had already started to come down.
Lisa Bachelor
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