The UK Office of Fair Trading (OFT) has provisionally decided to refer the private motor insurance market to the Competition Commission (CC) for an in-depth market investigation, on the basis that it has reasonable grounds to suspect that there are features of the market that prevent, restrict or distort competition. The OFT is now consulting on these provisional findings.

In September 2011, the OFT issued a call for evidence in relation to the private motor insurance market. This was prompted by reports that comprehensive car insurance premiums rose by 40% between 2010 and 2011. On 14 December 2011, the OFT announced that it had decided to launch a market study, based on the information it had received, with the aim of gathering further evidence before consulting on whether or not to make a market investigation reference (MIR) to the CC.

The OFT has now announced that it had provisionally decided to make an MIR (see According to the OFT, it has found evidence that insurers of not-at-fault drivers and others (such as brokers, credit hire organisations and repairers) take advantage of the lack of control that insurers of at-fault drivers have over the way in which repairs and vehicle replacement services are carried out to generate revenues through rebates and referral fees and so inflate the costs of insurers of at-fault drivers. This in turn raises the total cost for providing private motor insurance, which all drivers pay, with premiums potentially being pushed up by £225 million a year.

The OFT has stated 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 by raising rival insurers' costs and increasing intermediaries' revenues.

The OFT report supporting its proposed decision highlights a number of practices that appear to inflate the cost of replacement vehicles to not-at-fault drivers, such as referring drivers to credit hire organisations charging higher daily rates in exchange for a referral fee. The OFT has found that the cost for a replacement vehicle is on average 106% greater when the not-at-fault driver's insurer, rather than the at-fault driver's insurer, controls the process. The OFT has also found that not-at-fault drivers receive replacement vehicles of a higher specification than necessary and for longer than necessary which inflates the bills for the at-fault insurers.

The OFT has also found that certain practices inflate the cost of repairs to not-at-fault drivers' vehicles: for example, the referral fees paid to insurers by repairers and paint and parts suppliers appeared to be passed on to the at-fault drivers' insurers. Some insurers have agreements with their approved repairers to charge higher rates when repairing the vehicle of the not-at-fault driver, which again is passed on to the at-fault driver's insurer.

The OFT found that insurers had developed a number of ways to try to mitigate the impact of these practices, such as "capturing" the not-at-fault driver's claims, challenging bills for the not-at-fault driver's claims and bilateral/multilateral agreements to try to reduce disputes. However, these all require significant resources, and the OFT is concerned that this may also be increasing the price of motor insurance premiums charged to customers. The OFT added that these resources could, in theory, be channelled into reducing premiums for consumers and improving customer service.

The issues addressed by the OFT are not new. The OFT considered similar issues in 2002, when it investigated an agreement between insurers to keep down rates paid for replacement car hire, which was notified to it under the Competition Act 1998 by the Association of British Insurers (ABI). Although the OFT initially found that the agreement infringed competition law, this decision was set aside on appeal and the matter subsequently re-examined by the OFT. In 2008, the OFT announced that it had closed its investigation because it was no longer an administrative priority, noting in particular the fact that there was a lack of consumer benefit in taking the case forward. Having failed with applying the Competition Act, the OFT clearly feels it will have better luck under the MIR procedure.

Interestingly, announcement of the OFT's provisional decision had an immediate adverse impact on the share price of at least one motor insurer, although it was welcomed by the ABI. The OFT is now consulting on its findings, and interested parties are invited to respond by 6 July 2012. Although this is just a provisional decision at this stage, the OFT's practice following provisional findings suggests that it will go on to refer the matter to the CC. If the market is referred, the CC will have two years to conduct its investigation, following which it will have the power to impose a range of remedies to address any distortion of competition it finds. These include imposing undertakings on market participants to change their behaviour, banning specific practices or recommending legislative changes to the Government. The CC's market investigations are generally resource intensive for the CC and for market participants, who can expect to receive burdensome information requests if the market is referred. The CC's wide-ranging remedial powers mean that market participants may also find themselves faced with major changes to the market following the CC's investigation.

To access the provisional decision and other consultation materials, please click here.