The U.K.'s Faulty Car-Insurance Market

Car insurance in the U.K. is a wreck.

Prices for auto insurance are rising 40% annually, but many of those writing the business still are losing money. The Association of British Insurers estimates the industry as a whole hasn't been profitable for 16 years. Now, the Office of Fair Trading is investigating the rise in prices. It certainly could apply the jumper cables.

With 10 companies, and none exceeding a 30% market share, car insurance looks like a competitive market. Price-comparison websites, which now dominate sales, are helping to drive prices down. But the role of such websites will be included in the Office of Fair Trading's investigation. This year, it raised concerns about insurers sharing car-insurance pricing information on market analysis software.

Insurers blame spiraling prices on claims inflation and litigation costs, following the emergence of a "no-win, no-fee" claims-management industry. For low-value claims, insurers now estimate they are paying almost as much to lawyers in fees as they are to the injured party. They say insurance fraud, too, has risen. Over the last five years, personal-injury claims from car accidents have risen 10% annually, including a large number recently for whiplash, which is hard to prove medically.

But claims inflation is partly insurers' own fault. The problem is referral fees, money insurers receive from passing accident victims' details onto third parties. That helps fuel the growth in claims, because lawyers recoup the money off the insurer of the party at fault. Insurers are now pushing for the government to ban such fees, a move backed by the legal industry's representative body, the Law Society. AXA, already, has stopped the practice, but some companies are reluctant to act unilaterally.

Outlawing such fees would be a good first step. Requiring greater proof of damage to the car or driver before paying injury claims might be another.

Still, one reason for high prices simply is that insurers are earning lower returns on their investment portfolios, which in the past made up for weak underwriting profitability. There's little the Office of Fair Trading can do about that.