Regulator suggests remedies to address concerns with competition in motor insurance markets

Out-Law News | 17 Dec 2013 | 2:51 pm | 3 min. read

Drivers may be being charged £200 million more for motor insurance cover than they could be because of failings in the way costs associated with repairs and the provision of replacement vehicles are controlled following accidents, the Competition Commission (CC) has said.

The CC has suggested remodelling aspects of the market to address its concerns. One of the remedies it has proposed would make insurers of 'non-fault' drivers in an accident liable for the costs attached to providing their policyholders replacement cars following an accident. Insurers of 'at fault' drivers are currently liable for these costs but they lack control over how much is spent by the claimant, the CC said, resulting in extra costs being incurred. These costs are then passed on to motorists across the industry in the form of inflated premiums, it said.

"This separation of control and liability creates a chain of interactions which result in higher costs for replacement cars and for repairs being passed on to at-fault insurers," the CC said in a statement. "The CC estimates the extra premium costs to be between £150 million and £200 million a year."

"Under this remedy, non-fault claimants (and hence non-fault insurers via the principle of subrogation) would not be allowed to recover the costs of a replacement car from the at-fault insurer. Instead, insurers would be responsible for bearing the cost of providing a replacement car to their own policyholders in the event of a non-fault claim. We envisage that insurers would offer policyholders the option to choose the level of cover they would require in the event of an accident (i.e. no replacement car, a courtesy car or a like-for-like replacement car) for different premium levels," the CC said in its notice of possible remedies (24-page / 154KB PDF).

The CC published its notice of provisional findings (3-page / 39KB PDF) and notice of possible remedies following its investigation into the private motor insurance market. It highlighted a number of problems with the way the market functions. The Office of Fair Trading (OFT) referred the market for detailed scrutiny to the CC last year after stating that there were "reasonable grounds for suspecting that there are features of the market that prevent, restrict or distort competition".

The CC has provisionally found that competition in the market is distorted. It identified inefficiencies in the supply chain involved in handling claims and said it had found evidence of practices and conduct showing that some parties involved are "focused on earning a rent from control of claims" that resulted in "excessive frictional and transactional costs" being incurred.

The CC also said that there was evidence that some repairs carried out on vehicles following accidents were "substandard" and said there was insufficient oversight of the repairs by insurers and "significant limitations" to the ability of policyholders to assess the quality of repairs either. Repairs may be subject to compulsory audit in future under one of the remedies suggested by the CC.

"We provisionally concluded that these features distort competition between repairers to obtain business from insurers and other managers of drivers’ claims and result in detrimental effects on consumers because they can lead to consumers’ cars not being repaired to their pre-accident condition," the CC said.

Concern has also been provisionally raised by the CC with practices that involve bolting-on additional products to motor insurance cover offered, such as legal expenses insurance, personal injury cover, courtesy car cover, key loss cover and no-claims bonus protection.

The CC said the competition is adversely affected in the market because of the way information is displayed for these products with quotes for basic cover. It said it was "more difficult for consumers to identify the best-value offers in the market" because of the "information asymmetries" that exist between insurers and consumers and because of the "point-of-sale advantage held by motor insurers when selling add-ons".

Insurers may be required in future to ensure that the price of add-ons are provided to price comparison websites, that transparent information relating to no claims bonuses is displayed and that there is clearer descriptions of add-ons given to prospective customers.

"We have provisionally found that consumers have limited understanding of add-ons based on the differences in the quality and quantity information provided by different motor insurers, which overall appears insufficient for consumers to make informed decisions when purchasing add-ons," the CC said.

The CC also identified problems with agreements formed between some insurers and price comparison website operators that restrict the ability of insurers to offer cheaper insurance cover to motorists on other platforms. It has proposed remedies to address its concern.