“Our records indicate that you may be entitled to £3450 for the accident you had.

"To claim free reply CLAIM to this message”, went the text which my pal Phil Riley received last week.

This “accident” was, in truth, just a minor prang. Phil was stopped in traffic.

The chap behind drove into him, with minor damage to Phil’s car; no personal injuries. The other driver’s insurer paid Phil’s repair bill.

Within days of this prang - eighteen months ago - Phil was bombarded with texts and personal calls to tell him that if he’d make a claim, three or four thousand pounds would be his for the personal injury he suffered.

Phil told the callers that what they were doing was amoral. He had no injury.

The texts and calls continued.

Phil asked me, as his MP, how the claims companies had obtained his details including his mobile.

He’d never authorised this. Didn’t he have some basic data protection rights?

I went to see the Association of British Insurers (ABI), and senior executives of two of Britain’s largest motor insurers. I asked them.

A long pause, a look of embarrassment. Then, said one of these executives: “This is the industry’s dirty secret. "It’s we, the insurance companies, who sell on this personal information”.

Incredulous, I asked how it could be in an insurance company’s interest to sell information to a claims company which was then used to make a claim against the self-same company. “If we don’t sell this information, others in the know will do so – recovery firms, garages, credit companies, the insurance company on the other side, even the police.” (One police force made £1.3million in 2008-9).

The income from this trade is huge. £200 - £1000 for each referral.

There can be several from just one accident. Referral fees now form a crucial part of all insurance companies’ revenue stream.

Phil had another question for me. “Why, for law-abiding folk with impeccable records, are car insurance premiums rocketing, when our roads have never been safer?” The figures are stunning. In 2009 the number of road accidents involving personal injury was 31% down on the average for 1994-98.

Improvements in car safety mean that where there is an accident the risk of being badly injured has dropped significantly. Thefts of and from a vehicle have slumped – down almost three-quarters (72%) between 1995 and 2010.

Meanwhile, motor insurance premiums have shot up, by at least 30% in the last year; in some urban areas, by even more.

Yet most motor insurers are still operating at a loss.

The answer to Phil’s second question is that law abiding drivers are victim to “a dysfunctional system in which everyone behaves badly”, as one senior insurer put it to me. The rewards for this “bad behaviour” can be great. The number of registered claims management companies has doubled to 3,400 in two years.

Their high pressure sales techniques (as with Phil) has in turn led to a phenomenal growth in the number and value of claims for personal injury.

The cost of personal injury claims has doubled in ten years (from £7bn to £14bn.

ABI analysis shows a direct link between the number of claims companies in a region, and the level of claims.

In the North West, with a high density of claims’ companies, 40% of claims have a “bodily injury component” compared with 25% across the country – yet the region’s roads are no less safe.

The “bodily injury” which the claims’ company was enticing Phil to make was for “whiplash” – now accounting for 80% of all claims.

It’s perfect for the claims’ companies. It’s a “soft-tissue injury” which no scan or X-ray can pick up, and so relies on the patient’s description. It’s usually entirely trivial. Respectable medical websites prescribe “paracetamol”.

The cost to the NHS of treating the condition is put at just £8 million.

The cost to the insurers of whiplash claims is £2 billion. Very odd. The way the current legal costs arrangement of “no win no fee” means that it’s usually cheaper for an insurer to concede a claim than fight it.

Add to all this, the growth in “cash for crash” frauds, and it’s little wonder that the law abiding public are being milked as they are.

The senior insurance executives I’ve met are decent people. They dislike the unwholesome trap they are in.

But they know that change has to be imposed externally.

Here’s how:

1: Referral fees should be outlawed, and the no-win no-fee system speedily reformed, as Lord Justice Jackson’s 2010 review (endorsed by all parties) has recommended.

2: The law on damages for whiplash should be changed, to require proof of serious injury, as other jurisdictions do.

3: The Information Commissioner and Ofcom should come down firmly on the trade in personal data, and hard-selling techniques, if necessary with new powers.

4: New, much tighter regulation of the claims companies must be brought in.

There will be howls from those with a vested interest in the current “system”, all protesting that what they do is in the public interest.

It’s balderdash. This is not a system. It’s a racket. The quicker it’s ended, the better it will be for the law-abiding motorist, including my pal Phil.