Out-Law News | 26 Sep 2014 | 4:40 pm | 3 min. read
However, the Competition and Markets Authority (CMA) has decided not to cap the cost of providing a temporary replacement 'courtesy' vehicle to the driver that was not at fault in an accident, as indicated in a previous report. In its final report on the private motor insurance market (288-page / 3.4MB PDF), the CMA said that it had found "no effective remedy" to the high cost to the at-fault insurer of providing a courtesy car that would not have involved an unwarranted "significant change in the law".
"Whilst this problem does increase premiums for motorists, the extent of the problem is not as high as was at first envisaged and does not want such a radical measure," said Alasdair Smith, who chaired the CMA's investigation. "However, we do wish to challenge the benchmarks typically used in awards for non-fault replacement cars, which do not reflect the cost of the services provided and which we think should be lower."
"There are over 25 million privately registered cars in the UK and we think these changes will benefit motorists who are currently paying higher premiums as a result of the problems we've found," he said.
Insurers, however, criticised the watchdog's "u-turn" on the cost of courtesy cars. Trade body the Association of British Insurers (ABI) said that the CMA's lack of action "simply entrenches the business models of some replacement vehicle providers who profit from inflating car hire charges at the consumer's expense" while the Lloyd's Market Association (LMA), which represents the interests of the underwriters that make up the Lloyd's of London insurance market, said that it was considering legal action.
"The CMA has downplayed the costs of credit hire by expressing the costs on a 'per policy' basis – even though their own research shows that credit hire creates unnecessary costs of up to £178 million a year," said the LMA's David Powell. "It is remarkable that the CMA has not proposed a remedy to tackle a well-established 'adverse effect on competition' of this magnitude."
"Existing mitigation strategies have not worked, and fundamental legal reform is likely to be necessary to remove this unnecessary layer of cost," he said.
The CMA's predecessor, the Competition Commission (CC), began a motor insurance market investigation in 2012 at the request of then-competition and consumer protection watchdog the Office of Fair Trading (OFT). The CMA took over responsibility for the investigation when it began operating this year.
In its report, the CMA highlighted the anti-competitive effects of 'price parity' clauses in contracts between PCWs and motor insurers, as these prevented insurers from making their products available more cheaply on other platforms and ultimately pushed up the cost of premiums overall. It also found problems with the way that 'add-on' products, particularly no-claims bonus protection, were sold to consumers; finding in particular that the limited information provided about these products made it difficult for consumers to compare their costs and benefits.
The CMA's proposed remedies include a ban on price parity clauses, as well as requiring insurers to provide better information to consumers on the costs and benefits of no-claims bonus protection. It will also ask industry regulator the Financial Conduct Authority (FCA) to take a closer look at motor insurance-related add-on products as part of its ongoing work on insurance add-ons. In July, the FCA said that it was planning to impose a requirement on firms to publish the 'claims ratio', or the proportion of the retail price paid out to settle claims, as a measure of the value of a product.
The 'cost separation' between at-fault insurers, who meet the costs of post-accident services and courtesy cars to drivers not at fault, and the providers of those services, resulted in "inefficiencies in the supply chain" and also pushed up the cost of premiums, the CMA said in its report. However, it said that the average cost to consumers was only an additional £3 per year. Instead of pursue disproportionate changes to the law, the CMA said that it would instead reconsider the "artificial and high" benchmarks used when making awards for damages in relation to this type of claim, and encourage voluntary action by insurers to bring down the cost of handling claims.