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CMA’s grand plans come to nothing as GTA’s future hangs in the balance

The CMA has today published its report following its two year investigation into the private motor insurance market. The CMA has proposed three measures to increase competition, but it has stepped away from addressing the separation between claim cost and control that it identified as an issue in at-fault accident claims back in December last year. Gavin Perry takes a look at the report and what might happen next.

The CMA's proposals

The CMA has today published its report following its two year investigation into the private motor insurance market. The CMA has proposed three measures to increase competition, but it has stepped away from addressing the separation between claim cost and control that it identified as an issue in at-fault accident claims back in December last year.

The three measures being proposed are: 

  • a ban on agreements between price comparison websites and insurers which stop insurers from making their products available on other platforms at lower cost

  • better information for consumers on the costs and benefits of no-claims protection

  • a recommendation that the FCA looks at how insurers inform consumers about other products sold as add-ons to car insurance policies

The CMA’s failure to make any recommendations at all in respect of the supply of temporary replacement vehicles will be met with disappointment by insurers, particularly given the time and resources that the industry dedicated in supporting the investigation. That said, the final report will come as no surprise: it was clear a few months ago that the CMA had decided that it could do nothing to tackle the way the replacement vehicle market works in at-fault accident claims.

Whilst the CMA has not changed its opinion that the separation of cost liability and control represents an adverse effect on competition (AEC) they have concluded that there were no remedies available to them “which would be both effective and proportionate in addressing the AEC arising from the separation of cost liability and control, and the various practices and conduct of the parties managing non-fault claims”.

What did the CMA propose back in June?

When the CMA published its list of suggested remedies on 12 June, it proposed tackling costs separation by the introduction of a number of measures which were: 

  • The introduction and application of a “dual rate price cap”, with a low rate cap based on average direct hire daily rates plus fixed replacement vehicle arrangement costs, and a high rate cap calculated as a multiple of the low rate cap. The rate cap would be indexed to a publicly available index; and

  • A prohibition of financial inducements from replacement vehicle providers, where those inducements encourage claimants to take a hire vehicle at rates above the rate cap; and

  • Insurers telling claimants promptly if they are not at fault; and

  • Hire duration to end 24 hours after completion of the repair or seven days after the submission of the total loss payment.

In tandem with those measures, the CMA were then proposing that mitigation could be improved by what was essentially the introduction of GTA II: 

  • The completion of mitigation declaration statements by first notification of loss (FNOL) providers and countersigned by non-fault claimants upon receipt of a replacement vehicle.

  • An introduction of requirements on replacement vehicle providers to monitor the hire and payment arrangements.

However, when the CMA reported again on 28 July it concluded that it could not in fact impose a rate cap as the hire charges constituted a head of claim and not a cost and therefore the issue could only be taken forward in this way through legislation. At that point, the CMA had concluded that it would consider a recommendation to government to consider implementing primary legislation to address the issue if it considered it a proportionate and effective solution to the problem. However, having now concluded its investigation, the CMA has stated that it does not intend to make such a recommendation.

As efforts to improve mitigation were to work in tandem with the rate cap, the CMA has concluded that mitigation measures are unlikely to reduce frictional costs in their own right, and that it will not therefore take that remedy forward, especially as a GTA already exists that requires CHOs to provide a signed mitigation statement.

Commentary

Insurers will understandably be disappointed that the CMA felt unable to make any recommendation to address the adverse effect on competition created by the way the replacement vehicle market works in at-fault accident claims.

The earlier proposal of a rate cap was an attractive proposition for insurers and possibly some CHOs, as insurers would have been left with a greater degree of certainty of their potential exposure to any one claim and CHOs would have been provided with a greater degree of certainty as to their likely recovery in any one claim, potentially leading increased cash flows.

As many in the industry will recognise, the current GTA simply does function properly and frictional costs are incurred in claims due to differences of opinion arising as to:

  • what constitutes a “need to hire”,

  • what constitutes a reasonable hire period

  • what constitutes a reasonable hire rate

Where now?

Where a claimant requires a replacement vehicle it appears that the best strategy is to continue to endeavour to be first to the claimant with a reasonable offer of a replacement vehicle in accordance with Copley v Lawn (2009) and Sayce v TNT (2011). However, even before today, we were aware of some CHOs writing to their clients, requesting that they pass on any correspondence that might be received, leaving them to deal with it. Until there is case law that confirms that any reasonable offer to mitigate should be accepted, then we would expect to see an increase in friction in this area.

We also expect to see an increase in failure to mitigate arguments. For some time now it has been argued that, where a claimant has a comprehensive policy of insurance, there is a duty upon that claimant to claim on that policy for the damage to their vehicle. This was an argument that might have potentially been settled in the case of Umerji v Zurich (2013), but was ultimately not adjudicated upon. The Court of Appeal did though give an indication that the argument merited consideration at appeal court level. If case law were established confirming that a claimant with a comprehensive policy must claim on that policy, or else be considered to have failed to properly mitigate their loss, then we would expect to see a shortening of average hire periods across the piece and ultimately a reduction in frictional costs.

What next?

Insurers had expected more from the CMA process and alongside their disappointment will be considering their next moves in relation to the on-going issues in this area and the future of the GTA in particular. Whilst now, more than ever, one could hope that both sides of this industry come together with a view to producing an improved GTA that is fit for purpose, is that in fact likely? Insurers may wonder whether in the light of the CMA’s conclusion any worthwhile new-style GTA would be achievable, and CHOs may prefer the current position which they will see as having survived the CMA investigation to continue. Ironically, the net result of the CMA’s interest in this area could be a worsening of relationships between CHOs and insurers and a return to the “credit hire wars” of old.

It may now follow that more insurers will look to leave the GTA with a view to creating their own strategies to tackle excessive credit hire claims on a global basis and on an individual CHO basis and that this could lead to an increase in bilateral agreements where they can realistically be achieved.

As any credit hire portal would probably only have been accessible to signatories to the GTA, there could be a lack of any urgency to drive the concept forward. This too could be seen as a disappointment where a portal would have assisted both insurers and CHOs in ensuring a free flow of information from one to another, which would ultimately have led to an improvement in the speed of claim settlements and a reduction in frictional costs.

Whilst insurers are now likely to see an increase in frictional costs at least in the short term, we see it as highly unlikely that there will be any further intervention in this area by the CMA for the foreseeable future.

Contact

For further details please contact Gavin Perry, Partner on 0151 907 3493.

Read Gavin Perry's previous article on this subject:

CMA goes into reverse

By Gavin Perry

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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.

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