The £11bn motor insurance market is not working well for consumers, the Competition Commission said today as it published the interim findings of its investigation
The Office of Fair Trading asked the commission to look at the motor insurance market in September 2012 following concerns that competition in the market was being distorted. Now the first phase of its work is complete, it will turn its attention to ways in which the costs of premiums can be reduced.
Publishing provisional conclusions today, the Competition Commission said complex settlement chains had caused motor insurance premiums to balloon unnecessarily.
A system in which one insurer organises repairs and replacement vehicles and the other insurer foots the bill creates a chain of interactions that result in higher costs, it found. There is no incentive for the organising insurer to keep costs down because they are not responsible for paying out, the commission said.
These extra costs are eventually passed down to the customer in the form of higher premiums, an amount the commission estimated at between £150m and £200m a year.
Alasdair Smith, Competition Commission deputy chair 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.'
Smith added: 'There is insufficient incentive for insurers to keep costs down even though they are themselves on the receiving end of the problem,' he said.
The commission published a Notice of possible remedies that could improve competition and address the issues it has identified in the provisional findings. These included tackling the problems associated with separation of cost control and liability by either 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. In addition, there could be caps place on the costs of providing a replacement vehicle, on repair costs and compulsory audits of repair quality.
Interested parties are invited to respond to the Notice of possible remedies by 17 January 2014 and to the provisional findings report by February 7.
Commenting on the provisional findings, Murray Raisbeck a partner in the insurance team at KPMG, said competitive market forces and technological change would continue to exert greater pressure on premiums than the commission's proposed reforms.
He said: 'We have already seen how powerful these forces are, evidenced by the average premium reductions we have witnessed in the market during 2013.'
But KPMG welcomed the fact that the commission's findings were not purely focused on motor insurance pricing.
'It is also comforting to see alignment in the regulatory agenda; as the Competition Commission's findings are consistent with the areas that the Financial Conduct Authority are focusing on, as well as with the recently implemented Legal Aid, Sentencing and Punishment of Offenders Act reforms,’ said Raisbeck.