OFT motor referral may hurt insurer profits, warns Moody's

The Office of Fair Trading’s (OFT’s) decision to refer the UK private motor insurance market to the Competition Commission for a full investigation will create uncertainty for the industry and could result in lower premiums, according to ratings agency Moody’s.

Moody’s associate analyst Helena Pavicic wrote in a research note that any reduction in lower premiums would hurt profitability, particularly for the UK general insurers with the greatest market share in private motor, including the likes of Direct Line Group, Aviva, LV=, AXA, RSA and Ageas. Moody’s put a credit negative outlook on the commission’s investigation.

Pavicic said that the lack of control of insurers of at-fault drivers over repairs and replacement vehicles for non-at-fault drivers, as revealed by the OFT’s research, enabled insurers of non-at-fault drivers, brokers, credit hire firms and repairers to generate revenue through rebates and referral fees, thus artificially inflating claims costs.

She said the primary aim of any solutions proposed by the commission would be to decrease motor premiums, therefore reducing motor insurers’ revenues.

“Lower premium rates would intensify the negative pressure on what is already an unprofitable line of business for many UK insurers,” the note read.

“Given the earlier ban on referral fees in personal injury claims, it is plausible that the Competition Commission will seek to impose limitations, or possibly ban, referral fees and rebates received by insurers from repair shops and credit hire firms. Those fees totalled £130m in 2011. In the longer term, however, the negative effects of lower revenues would be neutralised if claim costs fell as a result of the action taken by the Competition Commission.”