136/11 14 December 2011
The OFT has today launched a market study into private motor insurance in the UK which will focus on the provision of third party vehicle repairs and credit hire replacement vehicles to claimants.
The decision to launch a market study was prompted by the responses to the OFT's recent call for evidence. This focused on finding out the facts and reasons behind recent reported increases in private motor insurance premiums.
The evidence the OFT has gathered suggests that private motor insurance premiums paid in the UK rose by around 12 per cent between 2009 and 2010, and by a further nine per cent in the first three quarters of 2011. Responses received by the OFT indicated that a key factor in these increases has been a rise in the costs associated with personal injury claims. However, the increased cost of third party non-injury claims, which include credit hire replacement vehicles and third party vehicle repairs, are also factors which have had a notable impact.
As a result of this work, the OFT has reasonable grounds for suspecting that there are features of the UK's private motor insurance market that restrict and distort competition relating to the provision of third party vehicle repairs and credit hire replacement vehicles to claimants. In particular, it has found that:
- Private motor insurers responsible for meeting third party claims for credit hire replacement vehicles and/or vehicle repairs appear to have only limited control over the choice of provider and appear to find it difficult to assess the extent to which the costs claimed are reasonable.
- Rival private motor insurers, brokers and credit hire providers may therefore have the opportunity, and the incentive, to carry out practices which allow them to generate revenues through referral fees, while simultaneously inflating the costs that the third party insurer has to meet. This in turn may contribute to car owners having to pay higher premiums.
The OFT also has concerns about the provision of motor legal protection cover to car owners and has today called on the Financial Services Authority to work with private motor insurers, as soon as possible, to ensure car owners have access to appropriate information when purchasing this cover. The OFT is concerned about the complexity of the product offering, and that the way it is being sold may make it difficult for car owners to assess the product's value for money.
As part of its analysis, the OFT also looked specifically at the prices of motor insurance premiums in Northern Ireland, which it found were approximately 11 per cent higher than in the rest of the UK. It considers that this may be partly explained by the fact that fewer consumers in Northern Ireland shop around for motor insurance - 55 per cent compared to 73 per cent of consumers in Great Britain. The OFT also received evidence that suggests there are higher personal injury compensation levels and higher legal costs associated with claims in Northern Ireland, as well as more frequent accidents.
Sonya Branch, OFT Senior Director of Services, Infrastructure and Public Markets, said:
'Our call for evidence has enabled us to gather information swiftly and efficiently so that we can now focus on specific features of the market that we are concerned could be restricting or distorting competition.
'Our concerns relate to the provision of third party vehicle repairs and credit hire replacement vehicles to claimants, where we suspect companies may be competing to extract money from each other rather than keeping premiums as low as possible and providing car owners with value for money. By carrying out a market study, we aim to clarify whether a market investigation reference to the Competition Commission is appropriate.'
The OFT expects to complete its market study by Spring 2012.
- The summary of the responses to the OFT's call for evidence is available on the Private motor insurance market study page.
- The market for the supply of private motor insurance encompasses credit vehicle hire organisations, repairers and other businesses providing services to drivers who have been involved in an accident; businesses that manage the provision of these services; and businesses that are involved in providing goods or services that are used by these service providers and those who refer work to these service providers. Private motor insurance should be understood as insurance cover supplied to UK based non-commercial car drivers. In its work the OFT focused on the supply of car insurance and have excluded other forms of private vehicle insurance.
- The OFT found that while motor insurance premiums in the UK have risen, actual premiums being paid appear not to have risen by as far as estimates based on analysis of comprehensive car insurance quote data might suggest (see note 1 of release OFT issues call for evidence on motor insurance, 8 September 2011)
- OFT market studies are carried out under section 5 of the Enterprise Act 2002 (EA02) which allows the OFT to obtain information and conduct research. Effectively, they allow a market-wide consideration of both competition and consumer issues. They take an overview of regulatory and other economic drivers in the market and consumer and business behaviour. Possible outcomes of market studies include: a market investigation reference to the Competition Commission (CC), enforcement action by the OFT, recommendations for changes in laws and regulations, recommendations to regulators, self-regulatory bodies and others to consider changes to their rules, campaigns to promote consumer education and awareness, or a clean bill of health.
- On the issue of personal injury claims, the OFT notes that the Ministry of Justice's Legal Aid Sentencing and Punishment of Offenders Bill 2011 proposes changes to the current system of conditional fee agreements to prevent claimants seeking compensation on a no-win, no fee basis. The MoJ hopes that such measures will discourage fraudulent or exaggerated claims and ensure that both parties to a claim are incentivised to minimise legal costs. It has also proposed a ban on the payment and receipt of referral fees in personal injury cases.
- The OFT's call for evidence also extended to price comparison sites. While the consensus among respondents was that the growth in the use of price comparison sites has intensified price competition, concerns were raised by some parties about practices that may have the potential to compromise how well price comparison sites work for private motor insurance consumers. For example, the use of certain 'best price guarantee' clauses may prevent insurers from undercutting the price it offers on a price comparison site and may reduce price competition. The OFT will monitor the possible impact of such clauses in the market and may decide to undertake further work across the price comparison site sector, if appropriate in light of its prioritisation principles.