"Dysfunctional" motor market referred to Competition Commission

The OFT said it made the decision after it found evidence that insurers compete in a dysfunctional way that may push up premiums for drivers by £225m a year.

It added it had reasonable grounds to suspect that features of the private motor insurance market prevent, restrict or distort competition.

In a market study, the government body found that insurers of drivers who are at fault in a road traffic accident have little control over the way in which subsequent necessary repairs and vehicle replacement services are carried out or the associated costs.

It added: “Insurers of the not-at-fault driver and others, such as brokers, credit hire organisations and repairers, can take advantage of this lack of control as an opportunity to generate revenues through rebates and referral fees and so inflate the costs of insurers of at-fault drivers.

“This is an inefficient way for the sector to operate, raising the total costs for providing private motor insurance which drivers end up paying.”

Inflated costs
The market study revealed that practices such as referring not-at-fault drivers to credit hire organisations and providing them with replacement vehicles for longer than necessary appear to inflate the cost of replacement vehicles provided to not-at-fault drivers, making it on average £560 more expensive each time.

The report also found that certain insurers receive referral fees and rebates from repairers, paint suppliers and parts suppliers, and have agreements with their approved repairers to charge higher labour rates when repairing the vehicle of the not-at-fault driver which they insure, leading to higher bills being passed to the at-fault driver's insurer.

Competitive edge
John Fingleton, chief executive of the OFT, said: “Competition in this market does not appear to work well for drivers. We believe the focus that insurers have on gaining the competitive edge through raising their rivals' costs means that drivers pay more than they need to for their motor insurance policies.

“Because insurers are distracted from competing primarily on the quality and value of service provided to insured drivers, incentives for greater efficiency may be reduced.

“There does not appear to be an appropriate, quick fix to these problems. We have provisionally decided that a more in-depth investigation by the Competition Commission, which has a range of additional tools at its disposal, may be necessary.”

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