In December 2013, the Competition Commission (CC), published the provisional findings of its investigation into the UK private motor insurance (PMI) industry. The Competition and Markets Authority (CMA) inherited this project from the CC in April 2014 and has now published its provisional decision on the package of measures required to remedy the adverse effects on competition and the resulting customer detriment. Broadly, the remedies can be summarised as:
- a dual rate price cap for subrogated claims relating to the provision of temporary replacement vehicles;
- application of the rate cap to all replacement vehicle providers at the point of subrogation of the claim to the at-fault insurer;
- prohibition of financial inducements from replacement vehicle providers;
- insurers to inform claimants promptly if they are non-fault;
- hire duration to end 24 hours after completion of the repair or seven days after the submission of the total loss payment;
- mitigation declaration statements to be completed by first notification of loss providers;
- requirements regarding the provision of information by insurers to consumers about the costs and benefits of no-claims bonus (NCB) protection covering: the implied price of NCB protection; step-back procedures; average NCB discount; and specific statements about how NCB protection works; and
- a prohibition on price comparison websites (PCWs) and PMI providers entering into agreements that include ‘most-favoured nation’ clauses (MFNs), with the exception of ‘narrow’ MFNs (defined as covering the insurance provider website but excluding possible aggregator platforms).
Theories of harm
Initially, the CC report identified the following theories of harm:
- separation of cost liability and cost control;
- possible underprovision of post-accident repair services;
- the sale of add-on products; and
- PCWs and MFN clauses.
The provisional remedies proposed by the CMA are based on the CC’s provisional findings, evidence received from interested parties and further working papers. Having considered the responses and supporting evidence submitted, the CMA now takes the view that there is not an adverse effect on competition relating to the possible underprovision of post-accident repair services and, therefore, does not propose any remedies in this area. The package of remedies focuses on the remaining three theories of harm.
Separation of cost liability and cost control
The provisional findings identified a possible adverse effect on competition caused by certain features of the PMI industry. The insurer of the at-fault driver often has little control over the costs incurred which, combined with various practices such as claims handling and car hire intermediaries charging at-fault insurers more than the costs incurred, means that the cost of claims rises and is reflected in higher premiums amounting to an estimated detriment of £113 million per year.
The CMA proposes to take forward two remedies to address customer detriment in this area:
- information on consumers’ rights following an accident. This remedy is aimed at giving claimants a better understanding of their entitlements both under their policy and arising through tort law. The CMA proposes that targeted, short-form information should be provided orally at first notification of loss to any claimant that is not found to be immediately at fault following an accident. The information provided with policy documentation should give an overview of the consumer’s key entitlements in tort as well as contractual rights under the policy and would take the form of a statement of consumer rights and responses to frequently asked questions. The CMA proposes that consumer information should be standardised across the industry to ensure that a consistent message is delivered to consumers and all consumers are adequately and accurately informed of their legal entitlements. The paper sets out the proposed text for the documentation and proposals for the submission of annual compliance statements; and
- measures to address features relating to replacement vehicles. This remedy would include: guidance on the duration of hire periods for replacement vehicles and a cap on daily hire rates for each category of replacement vehicle. A remedy which would require replacement vehicle providers to ask non-fault claimants standard questions about their need for a replacement car is also proposed. Replacement vehicle providers would be required to complete a ‘mitigation declaration’ showing the at-fault insurer that the appropriate vehicle had been provided.
The sale of add-on products
The provisional findings identified two features in relation to add-ons that have an adverse effect on competition: information asymmetries between motor insurers and consumers in relation to the sale of add-ons; and the point-of-sale advantage held by motor insurers when selling add-ons. The CMA notes that the net earned premium of those add-ons which caused concern was about £390 million a year. Particular asymmetries exist between NCB protection as consumers do not understand the level of discount earned through their NCB and how this level of discount will be affected in the event of a claim if they do not take out NCB protection.
Remedies proposed by the CMA to take forward are:
- transparent information concerning NCB. The CMA proposes that all insurers be required to: make available to consumers details of their NCB scales and include in the description of NCB protection a clear statement that a policyholder’s premium may increase following an accident in which that policyholder was not at fault even when that policyholder had taken out NCB protection;
- provision of all add-on pricing from PMI providers to PCWs. A possible remedy is to require each PMI provider that offers add-on products to provide pricing information on all add-ons it offers to the PCWs which list its policies; and
- clearer description of add-ons. This remedy requires all insurers to revise their descriptions of add-ons to meet ‘plain English standards’ and to strike an appropriate balance between providing the relevant information to the consumer and ensuring that the information is understandable and not unnecessarily complex.
Given the work that the Financial Conduct Authority (FCA) is already undertaking in the general insurance add-on market, the CMA recommends that the FCA work with insurers, brokers and PCWs to consider how firms might improve their descriptions of PMI-related add-ons. Specifically, the FCA might consider whether insurers and brokers should be required to provide their prices for the add-ons offered to PCWs and how consumers’ information needs in this area can be met.
Price comparison websites and MFN clauses
An adverse effect on competition was found between PCWs due to the existence of ‘wide’ MFNs in conjunction with sufficiently high single-homing rates. Wide MFN clauses specify that the premium quoted through the PCW will always be competitive with prices available through other sales channels. Narrow MFNs meanwhile state, in effect, that the price on the insurer’s own website will never be cheaper than the price quoted on the PCW.
The CMA found that wide MFNs restrict price competition between PCWs and entry to the PCW market, reduce innovation and increase premiums for the consumer. Conversely, narrow MFNs have only limited anti-competitive effects and do not substantially reduce competition between PCWs.
The proposed remedy is a prohibition on wide MFNs and ‘equivalent behaviours’ to strengthen rivalry over premiums offered on different PCWs. The CMA proposes achieving this by prohibiting all MFNs and listing the exceptions i.e. those narrow MFN clauses that have consumer benefits.
PMI providers, brokers and PCWs should review the remedies, particularly the measures around additional documentation requirements, and consider how these proposals could impact their business. The deadline for responses to the provisional decision on remedies is July 4. The CMA is required to publish its final report by September 27, 2014.
View CMA Private Motor Insurance market investigation, 25 June 2014