On 31 May 2012, the Office of Fair Trading (“OFT”) announced that it has provisionally decided to refer the private motor insurance (“PMI”) market to the Competition Commission for an in-depth review.

The OFT’s press release describes the competitive dynamic on this market as “dysfunctional”.  Its fundamental concern is that insurers of “at fault” drivers may have little control over the cost at which post-accident repairs and vehicle replacement services are provided. The OFT’s research, found in a market study report, suggests insurers of “not at fault” drivers and others (brokers, credit hire organisations and repairers) inflate the costs of insurers of at fault drivers and this makes for an inefficient and anti-competitive marketplace.

What are the anti-competitive practices identified?

The OFT’s market study specifies certain practices which result in higher bills for at fault drivers, including the following:

  • Not at fault drivers are often referred to credit hire organisations that tend to be more expensive, with the insurer, broker or repairer which makes the referral receiving a fee.
  • Not at fault drivers receive replacement vehicles for longer periods than necessary.
  • Repairers (including paint suppliers and small parts suppliers) pay referral fees and rebates to insurers, which end up being paid by the insurers of at fault drivers.
  • Insurers’ approved repairers charge higher labour rates which are also passed on to insurers of at fault drivers.

Overall, the OFT’s view is that PMI market players ought to focus on quality of service rather than “on gaining the competitive edge through raising rival insurers' costs and increasing their own revenues.”

What will happen next?

The decision to refer to the Competition Commission is provisional only, with yesterday’s announcement starting a consultation period which will end on 6 July 2012. The OFT expects to announce a definitive decision by October 2012.

The OFT acknowledges that there is unlikely to be a "quick fix" here. This is a large industry, of relevance to almost all consumers and involving complex third-party relationships. A two-year Competition Commission review seems likely and, if it goes ahead, could lead to significant regulation of the PMI market.