The Competition and Markets Authority (CMA) has announced new measures to improve competition in the private motor insurance market and reduce premiums for drivers.
These represent the final findings of an investigation into the £11 billion industry, which started with the CMA's predecessor in 2012 following a referral from the Office of Fair Trading (OFT).
After gathering evidence from more than 150 parties, the UK''s competition regulator has decided to put an end to exclusive price agreements and has called for better information around the costs and benefits of motor insurance add-ons.
The CMA says the changes could reduce premiums by around £20 a year.
Ending ‘price parity’
Exclusive price agreements between comparison websites and insurers are to be banned. This is where insurers are prohibited from making their products available more cheaply on other sites.
Around 23% of all private motor insurance business is conducted through price comparison websites.
While the CMA found these relationships encourage price competition between insurers, it found a lack of competition between the price comparison websites.
The body said the practice limited price competition, innovation and restricted new entry leading to higher car insurance premiums overall.
The CMA has now ordered the 'price parity' agreements to end, which is likely to take effect from next year.
Motor insurance add-ons
The CMA has also raised concerns about the sale of add-ons for car insurance.
It found there was limited information on the sale of extras like motor legal expenses insurance cover, key loss cover, extended foreign use cover and no-claims bonus (NCB) protection.
This made it difficult for shoppers to compare costs, especially with NCB protection.
The CMA has called for better information to be supplied in relation to the costs and benefits of NCB protection and it has recommended that the Financial Conduct Authority looks at how insurers inform drivers about other add-on products to motor insurance policies.
Cost separation
The CMA found that the ‘cost separation’ between the at-fault (liable for the cost of repair) and not-at-fault (in control of the cost) drivers caused "inefficiencies in the supply chain" for post-accident claims, which led to higher car insurance premiums.
In particular it found the amount at-fault insurers have to pay for replacement cars for the not-at-fault driver is significantly more than the cost of providing these services. The regulator said it cost the industry £110 million a year with around £84 million related to replacement cars.
However, the CMA was not able to find a solution to this issue of high charges for the cost liable at-fault drivers without a significant change in the law, which it said was not warranted as it only caused an increase of £3 a year to the average premium.
Alasdair Smith, Chairman of the private motor insurance investigation group and CMA Deputy Panel Chairman, said: “Reluctantly we have had to conclude that we cannot see an effective way of addressing this problem fully short of a fundamental change in the law and, whilst this problem does increase premiums for motorists, the extent of the problem is not as high as was at first envisaged and does not warrant such a radical measure."
Instead the CMA is encouraging action from those in the industry like the insurers and third party companies to make the market work better within the existing legal framework.
A "bitter pill to swallow"
The announcements weren't welcomed by industry body the Association of British Insurers (ABI), which described them as "a bitter pill to swallow for honest drivers". It's accusing the CMA of not dealing with the problem of insurance companies charging other insurance companies sky-high costs for replacement vehicles.
James Dalton, head of motor insurance at the ABI, 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 and when regulators fail, politicians need to step in to act."