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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:
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:
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 firstname.lastname@example.org.
The OFT expects to reach a final decision by October 2012.
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