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".

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

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, 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 data sharing should be compulsory, otherwise only reputable firms would be involved.

The report also warned of, "New forms of potentially dishonest practice - such as ordering additional medical reports on psychological harm arising from road traffic accidents."

It has urged the government to press the Solicitors Regulation Authority to stop its solicitors from "playing the system".