OFT gives green light to market study into private motor insurance

The OFT has this morning confirmed that it is launching a market study into the UK private motor insurance industry following the call for evidence made in September.

The call for evidence was a somewhat unusual step, with the OFT seeking information on a wide range of potential issues following reports of significant premium increases in private motor insurance over the last year. The OFT now reports that responses received to that call for evidence suggest that a key factor in the premium increases has been a rise in the costs associated with personal injury claims.  An additional factor (which the OFT states to have had a 'notable impact') is increased costs associated with non-injury claims, including credit hire replacement vehicles and third party vehicle repairs.

In particular, the OFT reports that its call for evidence has suggested that:

• insurers have only limited control over the choice of provider of vehicle repairs and credit hire replacement vehicles, with difficulties expressed over how to assess whether costs claimed are reasonable; and
• insurers may have the opportunity and incentive to generate additional revenues through referral fees, increasing the costs claimed from third party insurers and possibly leading to higher premiums.

Finally, the OFT has expressed concern about the provision of motor legal protection cover, including the complexity of the product and the way it is sold. The OFT has therefore separately called on the FSA to work with insurers to ensure that consumers are given adequate information when purchasing this cover.

It will be interesting to see whether the OFT repeats the additional step of starting with a call for evidence in future reviews.  It certainly appears at this stage that the OFT has been able to start broadly, before focussing its concerns more narrowly.  The OFT has said it expects to complete its study in spring 2012.  The OFT will then decide whether the test for a reference to the CC is met – in which case the options include a reference for a full review by the CC (which would take up to a further two years), or seeking undertakings from the industry to address any concerns identified.

At this stage, the OFT appears to be focussing on whether and how insurers are extracting additional revenues through the provision of third party vehicle repairs and credit hire replacement vehicle services to claimants and whether this is contributing to higher premiums.  This latter point may yet prove the hardest, particularly where there is no evidence that higher premiums have also resulted in higher profits - quite the reverse, with the industry having experienced two years of steep losses in 2009 and 2010.