OFT acts on dysfunctional UK motor market

OFT acts on dysfunctional UK motor market

The wheels turn slowly at the UK’s consumer watchdogs but finally the trading standards body, the Office of Fair Trading (OFT), has provisionally decided to act on the disgrace that is the UK motor market.

The OFT will refer the private motor insurance market to the UK Competition Commission, after it found evidence that insurers compete in a dysfunctional way that pushes up premiums for drivers.

The UK’s motor premium rates are among the highest in Europe despite the country’s roads being among the safest. The basic reason is that insurers load one another with unnecessary costs related to accidents rather than compete on price and service.

As the OFT explains, 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, in its new market study, the OFT found evidence that insurers of at-fault drivers have little control over the way in which these repairs and vehicle replacement services are carried out, or the associated costs.

Instead, insurers of the not-at-fault driver and others, such as brokers, credit hire organisations and repairers, take advantage of this lack of control as an opportunity to generate revenues through rebates and referral fees and so inflate the costs of insurers of at-fault drivers.

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

“On the basis of the evidence collected, the OFT has reasonable grounds to suspect that there are features of the private motor insurance market that prevent, restrict or distort competition.”

Effectively, insurers are playing an expensive game of beggar your neighbour: they aim to get competitive advantage by raising their rivals’ costs and by increasing their own revenues through spurious means.

This is a funny sort of free market isn’t it? You don’t think so? Take a look at the OFT’s evidence.

The OFT's market study spells out certain practices that appear to inflate the cost of replacement vehicles provided to not-at-fault drivers, making it on average £560 more expensive each time:

• After road traffic accidents, many insurers of not-at-fault drivers, brokers and repairers, refer those drivers to credit hire organisations that tend to charge higher daily hire rates, in exchange for a referral fee of between £250 and £400 per car hire;

• Not-at-fault drivers appear to receive replacement vehicles for longer periods than necessary, leading to inflated bills for the at-fault driver's insurer to cover.

The report also provisionally found that the following practices appear to be inflating the cost of repairs to not at-fault drivers' vehicles, by £155 on average each time:

• Certain insurers receive referral fees and rebates from repairers, paint suppliers and parts suppliers. It appears that the cost of paying these referral fees and rebates to insurers increases the repair bills being passed to the at-fault driver's insurer;

• Certain insurers have agreements with their approved repairers to charge higher labour rates when repairing the vehicle of the not-at-fault driver which they insure, leading to higher bills being passed to the at-fault driver's insurer.

That seems tantamount to fraud to me and the only reason that insurers are getting away with it is that they seem happy to be defrauding one another. The reality is that motorists are the mugs in the end – and they are beginning to see that.

It is no wonder that so many consumers in the UK have no qualms about making false claims, or inflating claims. Fewer than half of UK consumers consider it dishonest to inflate claims, according to a
recent survey by Axa. Why would they when they read what insurers are doing to them over motor cover?

Stating the obvious, the OFT says the market would work better if insurers competed primarily on the quality and value of the service each provides to insured drivers, rather than focusing on gaining the competitive edge through raising rival insurers' costs and increasing their own revenues.

John Fingleton, Chief Executive of the OFT, said: “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,” he added.

The motor industry seems incapable of helping itself. Let’s hope - for everyone’s sake - that the Compeition Commission can help. But don’t hold your breath.

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