OFT begins further investigation into private motor insurance market

The market regulator's investigation follows its recent call for evidence on the reasons behind reported increases in private motor insurance premiums.

Earlier this year, the AA's British Insurance Premium Index reported that the average cost of annual comprehensive car insurance rose by 40.1% in the year ending 31 March 2011. However the OFT said the rise was much smaller, amounting to 12% between 2009 and 2010 and a further 9% in the first nine months of 2011.

The OFT said it had reasonable grounds for suspecting that features of the market "restricted and distorted competition", particularly in relation to the bills faced by insurers for repairing cars after a crash and providing a courtesy vehicle.

"Our concerns relate to the provision of third party vehicle repairs and credit hire replacement vehicles to claimants, where we suspect companies may be competing to extract money from each other rather than keeping premiums as low as possible and providing car owners with value for money," said Sonya Branch, a senior director with the regulator. "By carrying out a market study, we aim to clarify whether a market investigation reference to the Competition Commission is appropriate.

The OFT said that it expected to complete its study by Spring 2012.

Under the Enterprise Act the OFT has the power to obtain information and conduct research on both competition and consumer issues. Possible outcomes of market studies include enforcement action, recommendations for changes in the law or a referral of the relevant market to the Competition Commission.

The OFT said that a rise in the costs associated with personal injury claims had been a leading factor in the increasing cost of premiums, but third-party non-injury claims – including the costs of third-party repairs and supplying courtesy cars - also had a "notable impact".

Insurers responsible for meeting these claims appeared to have only "limited control" over the choice of provider, the regulator said. This meant that rival insurers, brokers and credit car providers potentially had the opportunity to "carry out practices which allow them to generate revenues through referral fees", while increasing the costs that insurers had to meet.

The impact of the rising cost of personal injury claims on insurance premiums is being considered by the Government as part of the Legal Aid, Sentencing and Punishment of Offenders Bill. The Bill, which considers wider reform of the way in which civil court cases are funded, proposes changing the current system of conditional fee agreements to prevent motorists seeking compensation on a 'no win, no fee' basis. The Government has also proposed a ban on the payment and receipt of referral fees in personal injury cases.

The regulator also expressed its concern about the provision of legal protection cover to car owners, which is said was "complex" and in a way that made it difficult for car owners to judge the product's value for money. It asked the Financial Services Authority (FSA) to take steps to ensure car owners were given access to "appropriate information" when purchasing legal cover.

The insurance industry said that it was "pleased" that the regulator had recognised "inefficiencies" and "unnecessary costs" in the private motor insurance system.

"As an industry we are absolutely committed to taking action to improve the market for the benefit of consumers and are already working proactively to develop market practices to remove unnecessary costs that drive up car insurance premiums," said Nick Starling, a director with industry body the Association of British Insurers (ABI). "We look forward to continuing to engage with the OFT as they undertake their market study and we hope that this will lead to improvements in the industry and lower premiums for our customers."

In its call for evidence, the OFT asked insurers and other market participants for their views on a number of additional issues including the role played by price comparison websites. In June this year the FSA raised concerns that some price comparison websites might be leading customers to inappropriate car and home insurance deals. It is currently consulting on proposed guidance for website operators to ensure they are treating customers fairly.