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Summary of the Competition Commission’s annotated issues statement of their private motor insurance (PMI) market investigation

Summary of conclusions

The main focus of the Competition Commission intends to be on the separation of cost liability and cost control in the provision of post-accident services to non-fault PMI claimants. The Commission intends to consider this issue further, in particular by considering the effect(s) on competition between insurers and/or between other parties involved in the supply of PMI or the supply of post-accident services, and the effect(s) on consumers of the uplift in costs to fault insurers.

The Competition Commission also intends to consider further:

  • whether there is under provision in post-accident repairs due to the procurer of these services being different to the beneficiary (ToH 2), in particular by considering the results of research they have commissioned on the quality of post-accident repairs
  • the effects of the high concentration of PMI providers in NI (i.e. one issue under ToH 3)
  • the transparency and complexity of add-ons (i.e. one issue under ToH 4)
  • the balance of effects which arise from the MFN clauses in contracts between PCWs and PMI providers (i.e. one issue under ToH 5)
  • the effects of vertical paint supply contracts (i.e. one issue under ToH 5)

TOH 1: Harm arising from the separation of cost liability and cost control

Vehicle repairs: the Commission did not find evidence of significant over-provision of services but did find evidence that the costs charged for repairs which are not controlled by the at-fault insurer can be significantly higher than the cost of those repairs which they do manage. The separation of cost liability and cost control can increase the average cost of a non-fault repair by around £300 if it is a credit repair and up to £270 if the non-fault insurer manages the repair. The Commission also found that non-fault insurers do not pass on the referral fees they receive from input suppliers, which effectively increases the repair costs charged to the fault insurer.

Vehicle write-offs: the Commission found that over-costing of non-fault vehicle write-offs (estimated salvage values being set artificially low) increases costs for at fault insurers and that commission payments and referral fees received by non-fault insurers leads to over-costing of around £200 per non-fault vehicle write-off.

In relation to temporary replacement vehicles, the Commission found that the cost of vehicles for non-fault claimants is around twice as high when provided under a credit hire agreement rather than a direct hire arrangement which appears to be caused by higher daily rates and longer hire durations (an average 3.7 days longer). The two principal additional costs that arise in credit hire are (a) frictional costs (higher administration and legal costs) and (b) referral fees.

The Commission also summarise the evidence received from a customer survey conducted earlier this year which found the majority (75%) of respondents said that their vehicle was in the same condition as it was prior to the accident and that 68% said the temporary replacement vehicle they received met their needs. There were no statistically significant differences between those whose claim was handled by the non-fault rather than at-fault insurer.

In terms of the Commission’s current thinking in relation to TOH 1, they take the view that the separation of cost liability and cost control in the provision of post-accident services to non-fault claimants does give rise to a moral hazard problem where the ultimate costs paid by the at-fault insurer are higher than they would otherwise be and it appears that this is principally due to over-costing.

TOH 2: Beneficiary of post-accident services differs from the procurer

Quality of repair: the Commission found no systematic evidence that the quality of repair services received by either at-fault or non-fault claimants is sub-standard. In response to concerns expressed mainly by repairers and CMCs about the poor quality of insurer managed repairs, the Commission contracted MSX International to carry out repair inspections whose work is on-going.

Vehicle write-offs: the Commission found that it is unlikely that claimants suffer material harm in relation to the value they receive when their vehicle is written off.

The provision of temporary replacement vehicles: the Commission found that non-fault claimants appear more likely to receive a lower-quality vehicle when it is provided by the at-fault insurer than another party, although the majority of non-fault claimants appear happy with the service provided both in terms of the quality of the vehicle and the hire duration. The Commission is of the view; therefore, that this does not represent the under-provision of temporary replacement vehicles but may indicate a degree of over-provision when claims are managed by a party other than the at-fault insurer.

In terms of the Commission’s current thinking on TOH 2, they take the view that it does not appear that claimants suffer material harm in relation to the post-accident repairs or temporary replacement vehicle they receive due to another party procuring these services on their behalf, although this issue will be reviewed following receipt of the MSX International report.

TOH 3: Harm due to horizontal effects (market concentration)

The Commission considered the supply of private motor insurance in Northern Ireland and found that supply is more concentrated relative to the rest of the UK, especially for young and high-risk drivers. The Commission noted that the small size of the market in Northern Ireland provided insurers with a limited incentive to enter or expand in the market and that a lack of market knowledge placed smaller insurers or new entrants at a competitive disadvantage to large incumbents. The Commission found lower claims ratios in Northern Ireland relative to the rest of the UK, suggesting a higher level of profitability.

Price comparison websites (PCWs): the Commission found that their high concentration (4 sites) is likely to strengthen their bargaining power with providers of private motor insurance and that harm to providers of insurance or consumers is unlikely to arise purely as a result of the horizontal concentration of PCWs.

Cost estimation systems: the Commission considered the high degree of concentration of Audatex but their current thinking is that harm is unlikely to to arise as result of horizontal concentration in repair cost estimation systems.

In terms of the Commission’s current thinking on TOH 3, they believe that it is appropriate to consider the supply of PMI in NI separately to the rest of the UK and they intend to consider this issue further. They also intend to look further at the existence of some wide-scoped most-favoured-nation (MFN) clauses on contracts between PCWs and PMI providers.

TOH 4: Harm arising from providers’ strategies to soften competition

Having considered the FCA’s study into motor legal expenses insurance, the Commission investigated a number of add-on products sold in conjunction with private motor insurance, to examine how well these are understood by consumers and the level of profitability they generate for insurers. Most consumers found add-ons easy to compare between insurers but many consumers do not fully understand the coverage some add-ons provide, for example, more consumers claim to have no claims bonus (NCB) protection than is the case, which suggests consumers misunderstand the difference between having a NCB and having NCB protection.

The Commission considered the barriers to consumers switching their provider of private motor insurance, noting that switching levels are high relative to comparable products. The Commission considered automatic renewals, cancellation fees and NCB protection, finding that automatic renewals or cancellation fees do not appear to represent obstacles to switching. The findings on NCBs were less clear given consumers’ lack of understanding.

Overall, the Commission found that their initial work indicates consumer harm is unlikely to arise from any of three factors considered given high switching rates and they limited evidence any factor presented an obstacle. However, they indicated that they will consider this issue further.

TOH 5: Harm arising from vertical relationships

The Commission considered the ownership of PCWs by providers of private motor insurance and found that there is no suggestion that a PCW would currently undercut the top-quoted policy in order to favour the brand of their integrated private motor provider. Nor did the Commission find any evidence that the direct manipulation of a rival’s quote on a PCW-integrated private motor insurance provider had ever occurred.

Most-favoured nation (MFN) clauses: the Commission found 91% of policies sold through a PCW are subject to an MFN clause which restricts to varying extents the ability of the provider to offer the same policy for less on an alternative platform or channel.

The Commission’s current thinking is that narrow MFN clause (for example, which prohibit lower pricing on the insurance provider’s own website) are likely to have few anti-competitive effects although wide MFN clauses (which prohibit lower pricing through multiple sales channels) might create upward pressure on the cost of acquisition (and therefore on private motor insurance premiums), might increase premiums directly, might restrict entry and might lead to an excessive advertising spend. The Commission also considers that MFNs might have beneficial effects by improving the value for consumers of a search on a PCW and by allowing PCWs to earn a return on their investment. The Commission has yet to form a view on the balance of anti and pro-competitive effects.

The Commission investigated the harm that might arise as a result of the vertical contracts between insurers and manufacturers. For paint, the supply share of paint manufacturers appears low, customers appear price sensitive and expansion by rivals is relatively easy (which all suggest that repairers do not face input foreclosure) and there are many customers for paint and manufacturers produce paint for a wider European market (which suggest they do not face customer foreclosure) as a result of the vertical arrangements in place between some manufacturers and private motor insurers. For parts, the Commission found that the proportion of total repair costs represented by both original equipment manufacturer (OEM) parts and non-OEM parts was low and it does not appear that repairers (or private motor insurance providers) face input or customer foreclosure as a result of the vertical arrangements between some parts suppliers and some private motor insurers.

In addition to possible foreclosure effects, the Commission also considered non-foreclosure effects specifically in relation to the supply of paint. The Commission examined supply contracts which typically stipulate the insurer will recommend a paint brand or manufacturer to its repair network in exchange for a per-repair referral fee. The Commission takes the view that it appears these contracts reduce competition which might have led to a higher cost of paint for repairers and that contracts stipulating a minimum purchase volume are likely to have had a stronger effect. The Commission will consider these effects further.

Last updated 01/07/2016