The Competition Commission’s provisional findings on the £11 billion private motor insurance market have found that it is not working well for motorists and it is now looking at ways to reduce the cost of premiums.
The commission provisionally finds that the "complex chain" for the settlement of non-fault claims increases the costs of replacement cars and repairs which in turn is passed on to the insurers of at-fault motorists.
This results in higher motor insurance premiums for all drivers.
The commission has also found that, following an accident, too many repairs are not completed to the required standard.
Other provisional findings identify problems with the sale of add-on products to consumers and with the contracts between price comparison websites and insurers.
Alasdair Smith, Competition Commission deputy chairman and chair of the private motor insurance investigation group, said: "Our provisional view is that many drivers of the UK’s 25 million privately registered cars are footing the bill for unnecessary costs incurred during the claims process following an accident.
"These costs are initially borne by the insurers of at-fault drivers, but they feed through into increased car insurance premiums for all drivers.
"In most cases, the party managing the accident claim, typically a non-fault insurer or intermediary, is not the party liable to pay the costs of the claim. There is insufficient incentive for insurers to keep costs down even though they are themselves on the receiving end of the problem.
"We have concerns about the quality of post-accident repairs because too many repairs are substandard.
"We also find that the way add-on insurance products are sold makes it hard for customers to find the best-value products.
"Price comparison websites lead to increased competition to the benefit of motorists, but clauses requiring the same price to be offered for an insurer’s product across the market reduce competition.
"We are now considering a range of possible measures, some of them far-reaching reforms, to ensure that the market better serves the interests of customers."
In its provisional findings, commission has found that:
* In many cases following an accident the insurer of the ‘non-fault’ driver (or a claims management company) arranges for a replacement car and repair, while the insurer of the ‘at-fault’ driver foots the bill.
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 estimates the extra premium costs to be between £150 million and £200 million a year.
* Evidence shows that too many accident repairs are not carried out to the required standard.
Consumers have limited information about ‘add-on’ insurance products while insurers have a point-of-sale advantage. As a result, it is difficult for consumers to identify the best-value offers in the market and add-ons may be priced too high.
* The contracts between price comparison websites and insurers can require that individual insurers’ premiums are not offered more cheaply elsewhere.
The commission considers that some forms of these so-called ‘most favoured nation’ (MFN) clauses may be necessary to ensure that price comparison websites can continue to provide a beneficial service.
However, it believes that ‘wide’ clauses requiring the same price across all price comparison websites reduce competition and lead to higher premiums.
The commission has not considered personal injury claims, given recent changes such as the banning of referral fees for such claims and other changes proposed by the Ministry of Justice.
The commission has also published measures it could introduce or recommend to improve competition and address the issues it has identified, such as:
* tackling the problems associated with separation of cost control and liability either by making a driver’s own insurer responsible for providing a replacement vehicle or by giving at-fault insurers greater opportunity to take control over managing claims;
* caps on the costs of providing a replacement vehicle and on repair costs;
compulsory audits of repair quality;
* better and more comprehensive information for customers when comparing add-ons both on price comparison websites and on insurers’ own websites;
* a prohibition on ‘wide’ price-parity (or MFN) clauses on price comparison websites; and
improving claimants’ understanding of their legal entitlements in the event of an accident.
But, according to the AA’s British Insurance Premium Index, the cost of car insurance is falling, partly in response to changes being introduced by the Justice Ministry to curb the number and value of whiplash injury claims, many of which are fraudulent.
Simon Douglas, director of AA Insurance said: “The insurance industry is co-operating fully with the Competition Commission to help contain costs that ultimately lead to higher premiums.
“The motor insurance market is highly competitive and premiums are falling. Over the past year, the Shoparound average premium dropped by over 12% to £568*. But there is no doubt that more can be done particularly in better managing the claims process.
“The commission says that the issues they have identified with regard to vehicle repairs: ‘corresponds to 1.3% to 1.8% of the average premium or about £6 to £8 per policy’. While this would be welcome, to put it into context with fraud, personal injury claims and uninsured driving, there are larger issues still to be properly addressed.
“Curbs to the high cost of personal injury claims and particularly whiplash injury, which account for up to £90 per policy, are already having an effect on premiums.
“But there is scope to improve the process of organising repairs, hire cars while vehicles are under repair and uninsured losses.
“As the commission points out, there are several organisations involved in the claims process. If the result of the investigation is greater transparency and streamlining the way that claims are managed, particularly by the at-fault insurer, it will benefit both consumers and the insurance industry by reducing costs.”
The AA also welcomes the Competition Commission’s view of the price comparison site market and its criticism of the ‘most favoured nation’ clauses which prevent insurers from quoting a cheaper price than quoted on the site.
But Douglas said: “Many insurers listed on price comparison sites will strip out benefits from their policies and increase excesses, in order to offer the lowest possible premium. Such benefits might include legal protection, windscreen cover, hire provision in the event of an accident or cover while driving outside the UK – and are then sold as add-ons to the customer.
“This can lead to confusion over whether a policy offers value for money. But, price comparison sites do on the whole, increase competition and help to keep premiums in check.”
The Competition Commission has gathered evidence from more than 100 parties including multi-party hearings, individual hearings and written submissions. It has also conducted two consumer surveys and commissioned a post-accident repair assessment that was conducted by MSXI.
A summary of the provisional findings and possible remedies are now available on the private motor insurance home page on the commission’s website (http://www.competition-commission.org.uk/our-work/directory-of-all-inquiries/private-motor-insurance-market-investigation) along with other information relating to the investigation.
The full version of the provisional findings will be published in due course.
The commission is required to publish its final report by 27 September 2014.
Any interested party is invited to respond to the Notice of possible remedies by 17 January 2014 and provisional findings report by 7 February 2014.
To submit evidence, email firstname.lastname@example.org or write to:
Private motor insurance market investigation