Car Insurance Business Likely to be Investigated

The Office of Fair Trading is to undertake "further studies" before it refers the dysfunctional UK Car Insurance business to the Competition Commission.

The OFT has provisionally decided to refer the private motor insurance market to the Competition Commission after it found evidence that insurers compete in a dysfunctional way that may push up premiums for drivers by £225 million a year.

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. However, in its market study published today, 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.

The OFT's market study has provisionally found that the following practices appear to inflate the cost of replacement vehicles provided to not-at-fault drivers, making it on average £560 more expensive each time:

  • After road traffic accidents, many insurers of not-at-fault drivers, brokers and repairers, refer those drivers to credit hire organisations that tend to charge higher daily hire rates, in exchange for a referral fee of between £250 and £400 per car hire.
  • Not-at-fault drivers appear to receive replacement vehicles for longer periods than necessary, leading to inflated bills for the at-fault driver's insurer to cover.

The report also provisionally found that the following practices appear to be inflating the cost of repairs to not at-fault drivers' vehicles, by £155 on average each time:

  • Certain insurers receive referral fees and rebates from repairers, paint suppliers and parts suppliers. It appears that the cost of paying these referral fees and rebates to insurers increases the repair bills being passed to the at-fault driver's insurer.
  • Certain insurers have agreements with their approved repairers to charge higher labour rates when repairing the vehicle of the not-at-fault driver which they insure, leading to higher bills being passed to the at-fault driver's insurer.

John Fingleton, Chief Executive of the OFT, said:

'Competition in this market does not appear to work well for drivers. 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.'

Interested parties wishing to respond to the consultation on the proposed market investigation reference can send written representations to the OFT before 6 July by emailing

The OFT expects to reach a final decision by October 2012.

Responding to publication by the Office of Fair Trading of its market study examining the private motor insurance sector, Chair of the Transport Committee, Louise Ellman MP, said today,

" I welcome this report which follows on directly from the work the Transport Committee started with our Autumn 2010 inquiry into the escalating cost of car insurance.*

" The OFT's provisional decision to refer the highly dysfunctional UK market in private motor insurance and related goods or services to the Competition Commission for full investigation is a major step forward.  

"Like the OFT, we found evidence to support the view that various features of the private motor insurance market prevent, restrict or distort adequate competition in ways that do not deliver a fair deal to motorists.

"I will propose to the Transport Committee that we participate in the consultation announced today to make the strongest possible case for the referral.  

"I now expect car insurers and the other firms involved to co-operate fully with all stages of this process.

 "I look forward to the Competition Commission driving a process of market reform that will start to deliver a fair deal for motorists. However, this investigation will only tackle part of the problem created by the way in which many insurers, claims management firms, solicitors and others exploit every opportunity to generate revenues through referral fees and personal injury claims that inflate the premiums all motorists have to pay."

Transport Committee reports on the cost of motor insurance are:

The cost of motor insurance, 4th report 2010-12, HC 591, published March 2011,

Cost of motor insurance: follow-up, 12th Report, 2010-12, HC 1451, published January 2012,

The Government replies to these reports can be found at and

The Office of Fair Trading report can be found at

The Credit Hire Organisation (The CHO) has put a slightly different perspective on this, stating, "In response to today's decision by the Office of Fair Trading (OFT) to undertake further studies before it potentially refers the private motor insurance market to the Competition Commission, Martin Andrews, Director General of the Credit Hire Organisation (CHO) said that the original decision of the OFT to investigate the private motor insurance market came after insurer claims that motor insurance premiums had risen by almost 40 per cent to compensate for the increased costs of personal injury claims (whiplash) and other costs including those of credit hire. The Transport Select Committee subsequently identified that these claims were unfounded and the rise in premiums was in fact closer to 12 per cent and was caused by the increase in whiplash claims more than any other factor. The provisional findings from the OFT today conclude that the costs of any market dysfunctionality in the UK private motor insurance market place are £225 million, representing less than 2 per cent of the insurers' total annual spend of approximately £13 billion. Quite clearly then the costs of any market dysfunctionality are not the reason for the recent rise in the cost of premiums."

(Crash photo by Paul Williams.)


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