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Motor insurance market faces reform

An overhaul of the £11 billion private motor insurance market has been announced by the competition watchdog, including loosening the grip that price comparison websites hold over the way premiums are set.

The finalised package of measures unveiled by the Competition and Markets Authority (CMA) could knock around £20 off the cost of a typical policy, according to industry estimates.

But the watchdog was accused by the Association of British Insurers (ABI) of ducking a challenge to bring down "excessive" courtesy car costs.

The CMA previously said it was considering capping the cost of a courtesy car following an accident, after finding there was often little incentive to keep this cost down. But today it said that, "reluctantly", it cannot see a way of addressing the problem fully.

The moves it has announced include banning exclusive deals between insurers and price comparison websites which prevent insurers from offering premiums more cheaply elsewhere.

Currently, clauses in contracts between some websites and motor insurers block insurers from making their products available at a better price somewhere else, such as another comparison website. This restricts competition and leads to higher premiums generally, the CMA said.

However, price comparison websites will still be able to insert clauses which stop the motor insurer from offering a lower price on their own website.

Price comparison websites act as middlemen, matching consumers with insurers. The insurer sets the premiums at which their policies are available and the price comparison websites earns a commission fee of around £50 from the insurer per policy sold through their service.

These websites are the largest source of new private motor insurance business, being responsible for up to 65% of all new sales in 2012, the CMA said.

It found that price comparison websites have helped to ramp up competition between insurers by creating high levels of "price sensitivity".

They also appear to enjoy "a significant degree of market power" by reaching consumers who would be difficult for insurers to access themselves, it said.

The four largest price comparison websites are Comparethemarket.com, Confused.com (which is owned by insurer Admiral), GoCompare (owned by insurer esure) and MoneySuperMarket, the report said.

The big four combined account for over 95% of all private motor insurance sales made through price comparison sites.

The CMA said it had found the profitability of the four big players was "high", and that they "competed intensely" for consumer attention with large advertising budgets.

The watchdog's research found that consumers who use comparison websites typically do searches on a couple of them. But one third (33.5%) will only use one website.

Its report said: "Most private motor insurance providers told us that, in order to reach consumers, they had to list on price comparison websites.

"They said that each of the four large price comparison websites commanded access to a set of retail consumers whom they otherwise could not reach."

When it released an interim report in June, the CMA had proposed to put a ceiling on courtesy car costs following a car crash.

These costs are inflated because often, while it is the insurer of the innocent party who arranges a vehicle replacement, it is the insurer of the at-fault driver which picks up the tab, leaving little incentive to keep costs low.

But further investigations cast doubt on the CMA's ability to impose a cap. The CMA said today that tackling the problem would require a significant change in the law - and this would not be warranted as it adds only around £3 a year on average to premiums.

James Dalton, head of motor insurance at the Association of British Insurers (ABI), said the lack of a cap on "the excessive costs of replacement vehicles" will be "a bitter pill to swallow for honest motorists".

He said: "Far from reducing the cost of car insurance, the CMA's inaction simply entrenches the business models of some replacement vehicle providers who profit from inflating car hire charges at the consumer's expense. The reality is that the CMA has ducked this challenge."

Mr Dalton said the long-running investigation will have "cost taxpayers millions of pounds".

A spokesman for the CMA said: "We've looked extremely hard at ways we could tackle replacement car costs but ultimately these would require a fundamental change in the law. That reflects the reality, not our willingness to tackle it.

"As the ABI acknowledges, we are bringing in measures that will benefit motorists and we have also stressed that those within the industry have the ability to bring replacement car costs down themselves."

The CMA has also said that consumers should get better information about the costs and benefits of taking out protection on their no-claims bonus.

It recommends that the Financial Conduct Authority (FCA) looks into how insurers tell customers about other products sold as add-ons to car insurance policies, such as no-claims bonus protection, extended foreign use cover and key loss cover, and considers how consumers could be better informed.

The Office of Fair Trading (OFT) referred the private motor insurance market for a competition investigation in September 2012. The CMA did not include personal injury claims in its investigation as the Government is already clamping down on this.

The AA said that while the measures unveiled by the CMA could knock around £20 off the cost of a typical policy, around £200 has already been wiped off the average cost of comprehensive cover for someone who shops around since the end of 2011.

According to a British insurance premium index run by the AA, the average "shop around" cost of a comprehensive car insurance policy, bought direct or from price comparison sites, had fallen from £709 in December 2011 to £504 at the end of June this year.

GoCompare said it has "always strived" to show its customers the full story when it comes to insurance comparison.

It said: "We were the first comparison site to enable people to compare the levels of cover available, as well as price, and we have remained dedicated to helping people choose the most appropriate products rather than just the cheapest ones."

Peter Plumb, chief executive of comparison website MoneySuperMarket, said: "The removal of clauses from some price comparison website contracts, which prevent insurers from offering a cheaper premium through another price comparison website, is good for consumers.

"Unlike some other comparison websites, MoneySuperMarket never uses these clauses."

Steve Sanders, finance director at Confused.com, said: " We always strive to save consumers time and money and this has clearly been supported by the CMA as they see us as a force for good in the market place."

He welcomed the end to "price parity" agreements between websites and insurers, saying: " This ruling will allow us to offer better prices for the same cover to even more customers."

He continued: "With regards to the further investigation into motor insurance related add-on products recommended by the CMA, we agree with this measure and are already reviewing this area so that any customers who purchase an insurance policy through Confused.com have all the help and guidance they need to make an informed decision...

"We will continue to work with insurance providers to ensure we give our customers the best possible service and price for their insurance needs, while remaining competitive."

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