International Insurance News: Regulators to investigate motor insurance

Regulators will launch a full-blown investigation into the motor insurance market recently in a move that will cause months of uncertainty for the industry but could result in lower premiums for drivers.

The Office of Fair Trading will refer the industry to the Competition Commission – just as Royal Bank of Scotland puts the finishing touches on the prospectus for the flotation of its Direct Line insurance arm.

The inquiry, disclosed by people with knowledge of the matter, will put the industry – already under pressure from weakening premiums and muted investment returns – under mounting regulatory scrutiny.

Repair garages, lawyers and vehicle hire companies as well as insurers are all expected to be investigated by the commission, whose inquiries can lead to companies being forced to sell parts of their businesses or alter pricing models.

“It’s a really major issue,” said Eamonn Flanagan, equity analyst at Shore Capital. “I would go so far as to say that the business models of a number of insurance companies is predicated on these sources of income [that will be investigated].”

UK motor insurers have failed to turn a profit from underwriting insurance for 17 successive years. They have relied on investment income – now under pressure from low interest rates – and so-called “ancillary sources” of income.

Ministers already plan to ban the fees insurers collect for putting their customers in touch with personal injury lawyers.

However, the Competition Commission investigation will have far wider concerns. The regulators are concerned about how motor insurers behave when their customers are involved in accidents they do not cause.

The OFT has found evidence, for example, that replacement vehicles provided to blameless drivers were on average hundreds of pounds more expensive than normal market rates.

Another person close to the sector said that irrespective of the outcome, “it could involve a lot of time, money and energy”.

Books on the Direct Line offer – London’s biggest stock market launch this year – had been set to open by the end of the week. People familiar with the matter played down the prospect of the probe putting off the flotation but acknowledged it was possible it could drag over the weekend.

The OFT decided provisionally in May to make a referral to the commission after finding evidence the market’s “dysfunctional” nature was pushing up drivers’ premiums by as much as £225m a year.

But at the time it said it would hold a consultation with interested parties before making a final decision.

The Competition Commission’s investigation, which could take up to two years, may lead to a wider ban on referral fees.

But credit hire companies are expected to hit back.

“The predominant consequence of banning referral fees in a credit hire setting will result in depriving innocent victims of accidents being directed to advice that will explain their legal rights and to mobility solutions to which they are legally entitled,” said the Credit Hire Organisation.

The Competition Commission, OFT and Association of British Insurers declined to comment.

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