Friday, 13 June 2014

Government Competition and Markets Authority: Changes for Private Motor Insurance

The Competition and Markets Authority has today set out the changes it proposes to make in the private motor insurance (PMI) market to increase competition and reduce the cost of premiums for motorists.
The measures include:
  • a cap on the charges passed to the insurer of an at-fault driver in an accident for the cost of providing a replacement vehicle to the non-fault driver, to more closely reflect the costs incurred and remove significant inefficiencies
  • better information for consumers about their rights following an accident
  • a ban on price parity agreements between price comparison websites (PCWs) and insurers which stop insurers from making their products available to consumers elsewhere more cheaply
  • better information for consumers on the costs and benefits of no-claims bonus protection
  • a recommendation that the Financial Conduct Authority (FCA) looks at how insurers inform consumers about other PMI-related add-on products
The CMA is the UK’s primary competition and consumer authority. It is an independent non-ministerial government department with responsibility for carrying out investigations into mergers, markets and the regulated industries and enforcing competition and consumer law. From 1 April 2014 it took over the functions of the CC and the competition and certain consumer functions of the Office of Fair Trading (OFT), as amended by the Enterprise and Regulatory Reform Act 2013.
The Competition and Markets Authority (CMA) will now consult on these measures before publishing the final decision of its independent group of members in September 2014.
In December 2013, the CC’s provisional findings report found that there was a significant difference between the costs incurred by at-fault insurers in providing a replacement vehicle and the costs charged to the at-fault insurer when the replacement vehicle was provided by others. The CC found that this difference had the effect ultimately of increasing the cost of PMI to consumers.
The CC also found that some price parity clauses in contracts between PCWs and insurers had the effect of suppressing competition on price and were likely to lead to higher PMI prices overall.
In addition, the CC found that limited information in the sale of PMI-related add-on products to consumers made it difficult for them to compare the costs and benefits of products and to identify best value, in particular in relation to no-claims bonus protection.
At the time of its provisional findings report, the CC published a notice of possible remedies outlining potential measures in response to these problems and, following detailed discussions with a range of industry groups, the CMA has now identified what it considers will be the most effective actions to improve the market for motorists.
Alasdair Smith, Chair of the private motor insurance investigation group and CMA Deputy Panel Chair, said:
“There are over 25 million privately registered cars in the UK and we think these changes will benefit motorists who are currently paying higher premiums as a result of the problems we’ve found.
A cap on replacement vehicle costs will reduce the amounts charged to insurers of at-fault drivers, which will cut out some of the inefficiencies in the system and feed through to reduced premiums for all drivers. Through the measures we propose to introduce, we will address the problems that stem from those managing the non-fault accident claim having little or no incentive to keep costs down.
There also need to be improvements to the way price comparison websites operate. We believe they are great in helping motorists look for the best deal, and this in turn has driven insurers to compete more intensely, but we want to see an end to clauses which restrict an insurer’s ability to price its products differently, whether on different price comparison sites or on other channels.
We also find that the way motor insurance-related add-on products are sold makes it hard for customers to obtain the best value. We would like the FCA, as part of its on-going work looking at add-ons across all insurance products, to consider how drivers could be better informed in making their choices. We find that there are particular problems in relation to no-claims bonus protection, where both the price of this product and its benefits are often unclear to consumers, and we believe insurers should provide much better information about it.”
The CMA has also today published 2 working papers. The first contains a revised estimate of the costs to consumers which flow from the inefficiencies arising from the separation of cost liability and cost control in relation to the management of non-fault claims. The CMA finds that the costs to consumers in relation to the provision of replacement vehicles to non-fault claimants are between £70 million and £180 million per year. The second working paper presents a revised assessment of the quality of post-accident repairs. The CMA concludes that there is insufficient evidence of a problem in relation to competition with post-accident repair quality for it to intervene. Nevertheless, it observes that it is still concerned about the arrangements of many insurers for monitoring repair quality which appear to rely too much upon consumers identifying repair deficiencies.
The CMA’s investigation into PMI has focused on issues related to competition (rather than on any of the other topical issues in relation to motor insurance, for example fraud). The CMA has also not considered personal injury claims in its investigation, given recent changes implemented by the Ministry of Justice, such as the banning of referral fees for such claims, and other changes being considered.
The CMA has gathered evidence from more than 100 parties, including through multi-party hearings, individual hearings and written submissions. It has also commissioned two consumer surveys, some focus-group market research and a post-accident repair assessment.
The provisional decision on remedies, 2 working papers and all other information on the investigation are now available on the private motor insurance case page. The CMA is required to publish its final report by 27 September 2014.

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