The Office of Fair Trading (OFT) has referred the UK's private motor insurance market to the Competition Commission (CC) for further investigation. The OFT is concerned that the industry, which was worth an estimated £9.4bn in the UK in 2010, is not working well for motorists.


In September 2011, the OFT launched a call for evidence on the private motor insurance market to establish the facts behind reports that premiums in the UK had risen significantly, and to assess the potential reasons for such increases.

The OFT is empowered to make a market investigation reference (MIR) to the CC where it has reasonable grounds for suspecting that any feature of a market prevents, restricts or distorts competition. The OFT concluded that findings from the call for evidence established such grounds.

As a result, the OFT launched a market study into the private motor insurance market in the UK in order to gather further evidence before consulting on whether or not to make an MIR to the CC. The market study report was published in May 2012 and the OFT invited submissions on a proposed MIR. Responses were received from 28 parties including industry participants, government, consumer representative groups and consumers.

The OFT confirmed on Friday that it had decided to make an MIR.

Terms of reference

The MIR has been made in respect of the supply or acquisition of private motor insurance and related goods or services in the UK. The OFT concluded that it had reasonable grounds for suspecting the presence of features in the market that may prevent, restrict or distort competition in the UK. For the purposes of the reference, 'private motor insurance' means insurance cover against damage to property and personal injury that is supplied to or acquired by drivers of privately owned motor cars designed and used for non-business (private) use. It excludes motorcycles.

Features of the market

In its decision to make an MIR the OFT has highlighted two features of the market that give rise to concern.

First, the insurers of at-fault drivers that are responsible for meeting claims for the provision of repairs or replacement vehicles to not-at-fault drivers often appear unable to exercise choice over how these services are provided. Insurers of at-fault drivers appear to find it difficult to assess the extent to which the costs claimed are reasonable, and appear to exercise only limited control over the cost of these services. The actions that insurers can take to mitigate claims themselves appear to add to costs.

Second, the insurers of not-at-fault drivers, brokers, credit vehicle hire providers, credit repairers and others that supply services to motor insurers have the opportunity and incentive to take advantage of the insurer of the at-fault drivers' lack of control over costs. They do this by carrying out practices that allow them to generate revenues through referral fees or rebates, while simultaneously increasing the costs that the insurer of the at-fault driver has to meet.

The OFT's market study report provides further detail in relation to the two concerns.

The report found that many insurers, brokers and repairers refer not-at-fault drivers to credit hire organisations in return for a fee of between £250 and £400. The replacement vehicles tended to be charged at a higher daily rate than other options and were typically used for longer than necessary. Some insurers of not-at-fault drivers received additional referral fees and/or rebates from referring repair work to specific approved repairers and credit repairers. Others earned additional referral fees and rebates from agreements with suppliers of paint and parts to their approved repair networks.

The OFT considered that the overall impact of these practices was likely to be an increase in costs across the private motor insurance industry. Replacement car hire and repair is respectively £560 and £155 more expensive in an average case than it needs to be. This cost private motor insurers an estimated £225m in 2011, which equates to around £10 per policy.

The market investigation

Market investigations are used as a means of identifying and addressing all aspects of market failure, from competition issues to consumer detriment and the effect of government regulation. The CC must use the investigation to either dispel or confirm the OFT's provisional concerns. If the CC decides that there is an adverse effect on competition it must decide what, if any, action it or third parties should take to remedy, mitigate or prevent the adverse effects on competition.

The CC must issue a final report within two years of the MIR. In practice, it tries to complete them in a shorter timeframe.

Shortly, the CC will publish an administrative timetable setting out deadlines for the gathering of evidence, the publication of working papers and provisional findings, and the final report itself.

It is typical for an issues statement setting out the parameters of the inquiry to be published within a month or two of the administrative timetable. The CC will subsequently gather evidence by means of site visits, hearings of witnesses and the issuing of questionnaires.

Although the CC's only statutory obligation is to publish a final report, the CC will typically publish a report of provisional findings about halfway into the investigation timetable as well as various working papers. The CC may also choose to publish notices of possible remedies inviting comments from interested parties on possible actions which the CC might take in order to remedy, mitigate or prevent the adverse effect on competition.