MOTOR insurance is a "highly dysfunctional market" in which firms' pursuit of profit has led to higher prices for consumers, a report by MPs has said.

In some cases, business practices have not been in the consumer interest and have "inadvertently encouraged criminal activity", the report from the House of Commons Transport Committee said.

There was no clearer example of this than "insurance firms' willingness to pay compensation for whiplash claims which they suspect are fraudulent without requiring the claimant to undergo a medical examination".

The committee said steps were being taken to prohibit insurers from offering to settle whiplash claims before the claimant had undergone a medical examination.

"We agree and would like to see this practice banned altogether," the committee said.

The MPs also said they agreed in principle with the Government's requiring of courts to strike out "dishonest" insurance claims where, for example, there had been gross exaggeration.

But the committee cautioned against hasty legislation "because there may be complex legal implications".

The committee also agreed with Government plans to prohibit solicitors from offering inducements, such as cash or tablet computers, to people considering making claims.

The report said progress in enabling insurers and claimant solicitors to share data about potentially fraudulent claims had been slow.

The MPs said that when data sharing began it should be compulsory, otherwise only the most reputable firms would be involved.

The report went on: "We also note evidence that new forms of potentially dishonest practice - such as ordering additional medical reports on psychological harm arising from road traffic accidents -are emerging.

"The Government should press the Solicitors Regulation Authority to stop some solicitors from playing the system to maximise their income from unnecessary medical reports."

Launching the report, the committee's chairman Labour MP Louise Ellman, said: "This is our fourth report on the cost of motor insurance and while premiums are now falling, aspects of the market remain dysfunctional and have encouraged criminality to take root.

"Further action is still required to tackle fraud whilst protecting genuine claimants."

Simon Douglas, director of AA Insurance, said: "Despite the reforms already introduced, insurers are still footing the bill for the increasing number and cost of personal injury claims, particularly whiplash, even though the number of crashes and injuries on Britain's roads continues to fall.

"This suggests that attempts at fraud are still rising, while insurers are even starting to see claims for psychological injury following even very minor collisions.

"Insurers are working hard to identify attempts at fraud and are becoming increasingly successful, as figures released earlier this year underlined, but more can be done."

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