44/12    31 May 2012

The OFT has provisionally decided to refer the private motor insurance market to the Competition Commission after it found evidence that insurers compete in a dysfunctional way that may push up premiums for drivers by £225 million a year.

After a road traffic accident, the at-fault driver's insurer is responsible for meeting the cost of repairs and replacement vehicles for the not-at-fault driver. However, in its market study published today, the OFT found evidence that insurers of at-fault drivers have little control over the way in which these repairs and vehicle replacement services are carried out or the associated costs.

Instead, insurers of the not-at-fault driver and others, such as brokers, credit hire organisations and repairers, can take advantage of this lack of control as an opportunity to generate revenues through rebates and referral fees and so inflate the costs of insurers of at-fault drivers. This is an inefficient way for the sector to operate, raising the total costs for providing private motor insurance which drivers end up paying.

On the basis of the evidence collected, the OFT has reasonable grounds to suspect that there are features of the private motor insurance market that prevent, restrict or distort competition.

The market would work better if insurers competed primarily on the quality and value of the service each provides to insured drivers, rather than focusing on gaining the competitive edge through raising rival insurers' costs and increasing their own revenues.

The OFT's market study has provisionally found that the following practices appear to inflate the cost of replacement vehicles provided to not-at-fault drivers, making it on average £560 more expensive each time:

• After road traffic accidents, many insurers of not-at-fault drivers, brokers and repairers, refer those drivers to credit hire organisations that tend to charge higher daily hire rates, in exchange for a referral fee of between £250 and £400 per car hire.
• Not-at-fault drivers appear to receive replacement vehicles for longer periods than necessary, leading to inflated bills for the at-fault driver's insurer to cover.

The report also provisionally found that the following practices appear to be inflating the cost of repairs to not at-fault drivers' vehicles, by £155 on average each time:

• Certain insurers receive referral fees and rebates from repairers, paint suppliers and parts suppliers. It appears that the cost of paying these referral fees and rebates to insurers increases the repair bills being passed to the at-fault driver's insurer.
• Certain insurers have agreements with their approved repairers to charge higher labour rates when repairing the vehicle of the not-at-fault driver which they insure, leading to higher bills being passed to the at-fault driver's insurer.

John Fingleton, Chief Executive of the OFT, said:

'Competition in this market does not appear to work well for drivers. We believe the focus that insurers have on gaining the competitive edge through raising their rivals' costs means that drivers pay more than they need to for their motor insurance policies.

'Because insurers are distracted from competing primarily on the quality and value of service provided to insured drivers, incentives for greater efficiency may be reduced.

'There does not appear to be an appropriate, quick fix to these problems. We have provisionally decided that a more in-depth investigation by the Competition Commission, which has a range of additional tools at its disposal, may be necessary.'

Interested parties wishing to respond to the consultation on the proposed market investigation reference can send written representations to the OFT before 6 July by emailing motorinsurance@oft.gsi.gov.uk.

The OFT expects to reach a final decision by October 2012.

NOTES

1. See the Private Motor Insurance market study.
2. The market study was launched because the information gathered during the call for evidence gave the OFT reasonable grounds for suspecting that there are features of the market for private motor insurance in the UK that are preventing, restricting or distorting competition. 
3. The call for evidence found 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.A key reason for the rise appears to be an increase in the costs of personal injury claims. The DfT and MoJ are committed to working with industry to dealing with whiplash and other personal injury claims costs.
4. The OFT proposes to refer the market for the supply or acquisition of private motor insurance and related goods or services in the UK. 'Related goods or services' are included to ensure that the actions of other market participants are included within the scope of the potential MIR. 
5. 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: enforcement action by the OFT, a market investigation reference to the Competition Commission (CC), 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.