Competition Commission: market investigation into private motor insurance
Competition Commission has now reported following its investigation into the private motor insurance market by publishing its provisional findings together with details of possible remedies. Nigel Teasdale highlights the key findings and proposed remedies and considers the next steps in the process.
Competition Commission provide food for thought
The Competition Commission has now reported following its investigation into the private motor insurance market by publishing its provisional findings together with details of possible remedies. The list of provisional findings will not come as a surprise to anyone familiar with the Commission’s work, although some of the remedies that the Commission propose may prove to be controversial. The Commission has identified two areas which require attention, one in respect of the claims process and one at the point of sale.
The Commission has concluded that there is a separation between costs liability and costs control in claims following a fault accident: whilst the at fault insurer has to pay the claim, the non fault insurer is in control of the cost. The disconnect that it sees has led to the position that the party managing the claim focuses on generating rent from the control of claims, with little or no regard for the cost. The resultant increase in cost in the claims process inevitably leads to higher premiums, say the Commission.
The Commission has concluded that the separation between costs liability and costs control, in the sourcing of replacement vehicles and the purchasing of repair services, needs to be bridged and they have suggested two potential remedies.
First party insurance for replacement cars
The first potential remedy is a position whereby policyholders would be offered different levels of cover: either (a) no replacement car, or (b) a courtesy car, or (c) a “like for like” replacement, and the cost of that cover would depend upon which option the policyholder selected. If the policyholder chose a replacement vehicle option then insurers would be liable to the policyholder for the cost of a replacement vehicle in the event of an accident and non fault claimants would not be permitted to recover that cost from the negligent driver’s insurers.
Whilst this remedy would bring the purchasing of replacement vehicles into sharp focus for insurers, in some circumstances this could lead to non fault claimants not being placed back in the same position they were in before the accident took place and, as a result this remedy would require a change in the law.
At fault insurers to be given first refusal to handle non fault claims
The second remedy would be more straightforward: in the event of an accident the at fault insurer would be given the option to either handle the whole of the claim, or just the replacement of the claimant’s car. This would give the at fault insurer an opportunity to control costs. Upon receipt of first notification of loss the claimant’s insurer would notify the at fault insurer of the claim and the at fault insurer would then be given a limited period of time to contact the claimant to offer a replacement car and manage repairs. The claimant could then choose to accept the fault insurer’s offer or decide to leave the claim in the hands of his own insurers.
Measures controlling the cost of replacement vehicles to no fault claimants
The Commission has also identified two further measures that could lead to costs control in respect of replacement vehicles:
A replacement of the current Guaranteed Terms of Agreement (“GTA”) which would contain guidance as to duration of hire periods where the claimant’s vehicle is driveable, in order to reduce periods between the start of hire and commencement of repairs, as well as a cap on daily rates. This step could require the use of an online portal (the Commission observes that the GTA Technical Committee is evaluating technical feasibility of such a portal).
A requirement for non fault claimants to answer a list of standard questions about their need for a replacement car which would then inform the provision of the vehicle and the duration of hire. The mitigation declaration would then be supplied to the at fault insurer in the event of a dispute.
Measures to Control Non Fault Repair and Write off Costs
The Commission has also proposed two ways in which the costs of non fault, bent metal claims might be controlled:
Non fault insurers would be required to pass on to at fault insurers the wholesale price they pay to repairers, plus an allowance for administrative charges (the remedy might need to be considered in conjunction with a ban on referral fees). The Commission suggests that any repair costs recoverable through subrogation be limited to standardised costs (the standardised cost could be developed with the help of an estimation system, like Audatex).
The Commission found that the salvage value of a written off vehicle is sometimes set too low and it proposes that the at fault insurer be given the option of handling the salvage and that there be a requirement that all insurers account for actual salvage proceeds (including any referral fee paid to the salvage company), or that an adjustment take place on the estimated salvage value once the proceeds have been received.
Prohibition of Referral Fees
In respect of the costs of claim generally, the Commission has proposed a prohibition on referral fees or commission paid by CMCs/credit hirers, repairers and others in relation to the provision of replacement cars, any repairs and on commission paid by salvage companies to non fault insurers.
Quality of Repairs
Controversially, the Commission has concluded that the way that claims are managed has led to a lack of quality in the standard of repair costs and it proposes mandatory audits of repairers to ensure that standards are in place and maintained.
Point of Sale
The Commission also suggest that the industry needs to do more to improve claimants’ understanding of their rights, both in respect of claims under their own insurance policy and against third parties. It has concluded that there are two features in the supply of motor insurance which in combination lead to an adverse effect on competition.
Firstly, the presence of price comparison websites (“PCW”) has an adverse effect on competition and they are not necessarily a force for good in the market. Whilst the Commission accepts that insurers have the right to agree to not offer a product more cheaply on their own website, the practice of one PCW insisting that the product not be offered more cheaply on another PCW has to end in its view.
Secondly, The Commission has also suggested that the consumer needs greater clarity in the provision of “add ons”, such as legal expense cover and the protection of no claims bonuses.
Parties are now requested to provide their views in writing by the 17th of January 2014 and following receipt of those submissions, the Commission may then arrange hearings with some of the parties. The Commission aims to reach a provisional decision on remedies in May/June 2014. The Commission is required to complete its investigation by the 27th of September 2014.
If the recommendations are accepted, some will need primary legislation to implement. Where that is the case, the impending General Election in May 2015 and the usual difficulty of enacting new legislation towards the end of a parliamentary term may well be important. This area will remain a key focus for insurers during 2014 and beyond. It remains to be seen ultimately how far the Commission and the Industry will go in order to tackle the issue of excessive credit hire charges, which have been a thorn in the side for the last 20 years.
In the same way that Government has taken costs out of the system by reducing claimant legal costs through the LASPO and portal changes, following which it is looking to find a reduction in insurance premiums, so it may be attracted to some of the Competition Commission’s current recommendations which the Commission sees as aimed at reducing costs in other parts of the process, and which it thinks will have at least some effect on premiums going forward.
For further information please contact Nigel Teasdale,
Head of Motor, on 01772 554264
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.