Last October, the Office of Fair Trading (OFT) referred the private motor insurance (PMI) market to the Competition Commission (CC) for an in-depth market investigation as it had reasonable grounds to suspect that there are features of that market that prevent, restrict or distort competition.
The issue that resulted in the reference was a long-running one, which the OFT had previously considered a decade earlier. This is that when one party is at fault in a motor accident, repairs to the vehicle of the party who is not at fault are organised by that party’s insurer at the expense of the insurer of the party who is at fault. This means that the insurance company organising the repairs has no incentive to keep the repair costs at a minimum and the insurance company for the person at fault has no control over those costs, even though they are ultimately responsible for them. These costs are further inflated to generate revenues for insurance companies commissioning repairs through rebates and referral fees. They are passed on to customers and the OFT thought that drivers’ premiums were potentially being increased by £225 million a year.
The OFT said that the market would work better if insurers competed primarily on the quality and value of the service each provides to insured drivers, rather than raising rival insurers’ costs and increasing intermediaries’ revenues. However, it acknowledged that these are issues for which there is no “quick fix”. The CC’s investigation is a detailed one and it has until 27 September 2014 to issue its final report. If it considers it appropriate, the CC can impose remedies on those competing in the market; its statutory powers give it the ability to prohibit particular practices and to terminate existing agreements. It can also suggest that the Government makes changes in legislation.
In July 2013, the CC published an annotated issues statement which explains the theories of harm that it is investigating. The inflation of premiums because those paying for them (insurers of drivers at fault) have no control over the costs remains at the heart of the investigation. However, unlike the OFT, the CC does not believe that the lack of control leads to repairs being performed at a lower quality.
The CC is also looking closely at the relationship between insurers and price comparison websites (PCWs). It believes that each of the four main PCWs have bargaining power when negotiating with PMI providers. This is because, while most customers use more than one PCW, some consumers search on only a single PCW and PMI providers believe that they would lose significant volumes of sales if they do not contract with each of the major PCWs.
The CC is also considering whether the fact that some PCWs are owned by insurers could distort the market, for example, by undercutting competitors’ prices or through the manipulation of quotes, although the CC has not yet seen any evidence to this effect. The CC is also considering the effect of most favoured nations (MFN) provisions in agreements between PMI providers and PCWs. These prevent PMIs from advertising prices, on their own websites or other PCWs, if those prices are cheaper than those shown on the PCW. The CC found that 91% of PMI policies sold through PCWs are covered by some form of MFN clause. The CC’s current thinking is that narrow MFN clauses (which prohibit lower pricing on the PMI provider’s own website) are likely to have few anti-competitive effects. However, wide MFNs (which prohibit lower prices in multiple sales channels) might increase PMI premiums directly, deter market entry and lead to excessive spending on advertising. The CC is continuing to consider the possible pro- and anticompetitive effects of MFNs.
The CC is planning to hold hearings with interested parties during autumn 2013.