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High cost of car insurance may be due to anti-competitiveness in the insurance market, OFT says


The Competition Commission should investigate whether car insurers are acting in an anti-competitive manner, the Office of Fair Trading (OFT) has said. It said that there are "reasonable grounds" to believe that they are.

The competition and consumer protection regulator said it had "provisionally decided" to refer the market to the Commission after a study (75-page / 798KB PDF) it conducted revealed that the "dysfunctional way" that insurers operate may be causing drivers to pay as much as £225 million more in car insurance premiums than they otherwise might. It said there are "reasonable grounds" to believe the insurers are acting anti-competitively.

The OFT said that some insurers may be artificially driving up the cost of car insurance premiums because they are charging more than is due for dealing with driver claims in the aftermath of accidents.

"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," the OFT said in a statement. "However ... 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," it said.

The OFT said that its study provisionally revealed that referrals to credit hire organisations and providing replacement vehicles for "longer periods than necessary" has led to the cost of providing 'not-at-fault' drivers with replacement vehicles being £560 more expensive on average for each such claim.

In addition, the study showed that an average £155 extra is being levied on the cost of repairs to 'not-at-fault' drivers' vehicles because some insurers receive fees and rebates after referring claims to paint and parts suppliers. The inflation in the repairs cost is also due to some insurers charging higher labour rates through agreements they have with "approved repairers", the regulator said.

"Competition in this market does not appear to work well for drivers," John Fingleton, chief executive of the OFT, said. "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," he said.

The OFT's is consulting on its provisional decision until 6 July and expects to make a final decision over whether to refer the matter to the Competition Commission by October.

Under the Enterprise Act, the OFT can refer a market to the Commission if it has reasonable grounds for suspecting that features of that market prevent, restrict or distort competition in that area.

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