OFT says 'dysfunctional' motor market costs drivers £225m a year

The Office of Fair Trading (OFT) wants to refer the private motor market to the Competition Commission after a probe found that insurers compete in a “dysfunctional” way that hiked premiums by £225m last year, or £10 per driver.

The OFT started gathering evidence on credit hire vehicles and repairer networks in September 2011, and published its findings today.

After a road traffic accident, the at-fault driver’s insurer is responsible for meeting the cost of repairs and replacement vehicles for the not-at-fault driver.

However, the OFT has found evidence that insurers of at-fault drivers have little control over how these repairs and vehicle replacements are carried out, or the associated costs.

Instead, the OFT said that brokers, repairers, credit hire organisations (CHOs) and insurers of the not-at-fault driver take advantage and inflate costs for the insurers of at-fault drivers.

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

In the report, the OFT said there were parts of the private motor market that prevented, restricted or distorted competition.

The OFT said that the following practices raised the cost of replacement cars to not-at-fault drivers by around £560 each time:

• Insurers of not-at-fault drivers, brokers and repairers sending drivers to CHOs that charge higher daily rates, then getting a referral fee of between £250 and £400
• Not-at-fault drivers getting replacement vehicles for longer than necessary, raising bills for the at-fault driver’s insurer

The watchdog found that the following practices could be hiking the cost of repairs to not-at-fault drivers’ vehicles by around £150 a time:

• Insurers getting referral fees and rebates from repairers, paint suppliers and parts suppliers, in turn increasing the repair bills passed on to the at-fault driver’s insurer
• Insurers price-fixing by having their approved repairers charge higher labour rates for repairing the not-at-fault driver’s cars that they insure, leading to higher bills being passed to the at-fault driver’s insurer

The OFT recommended that the market would work better if insurers stopped trying to gain a competitive edge by raising rival insurers’ costs and increasing their own revenues after motor accidents.

OFT chief executive John Fingleton 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.”

The OFT is consulting on whether it should refer the issue, and expects to reach a final decision by October 2012.