LONDON: Britain’s car insurers look set to be investigated by anti-trust regulators after consumer watchdog the Office of Fair Trading said “dysfunctional” competition pushes up drivers’ annual premiums by 225 million pounds ($349 million).
Insurers jack up rivals’ costs by referring accident victims to replacement car firms and repair garages, for which they receive a fee, instead of competing on price, the OFT said.
It provisionally referred the sector to the Competition Commission and said it would make a final decision on a referral by October.
Analysts said a Competition Commission inquiry would make an outright ban on insurers earning referral fees more likely, denting profit at Admiral, Britain’s No.2 insurer and more dependent on such sources of income than rivals.
“The uncertainty this announcement brings to the suitability and sustainability of Admiral’s business model is likely to hang over the stock for months to come,” Shore Capital analyst Eamonn Flanagan said in a note.
Shares in Admiral, which makes about 60 percent of its profit from referral fees and other revenue not directly related to car insurance, were down 6.9 percent by 1420 GMT, underperforming a 0.1 percent fall in the FTSE 100.
The OFT began probing the car insurance market in December amid concern a lack of competition was contributing to soaring premiums.
“Competition in this market does not appear to work well for drivers,” OFT Chief Executive John Fingleton said.
“The focus that insurers have on gaining the competitive edge through raising their rivals’ costs means that drivers pay more than they need to for their motor insurance policies.”
Insurers of drivers involved in accidents they did not cause earn fees from referrals to car hire firms that provide vehicles at high rates and for longer than necessary, boosting the bill paid by at-fault drivers’ insurers, the OFT said.
Insurers of not-at-fault drivers further inflate competitors’ costs by earning fees from referrals to repair garages.
The Association of British Insurers said a probe by the Competition Commission should bring down costs and premiums.
“Regulation of all players in the market to tackle excessive costs is needed,” said ABI Director of General Insurance Nick Starling.
“For too long insurers have faced inflated rates for credit hire cars and excessive hire periods that have led to higher insurance premiums for customers.”
British motor premiums jumped 12 percent between 2009 and 2010 as insurers sought to recoup a rise in personal injury claims they blamed on the growing influence of “no win, no fee” lawyers.
However, the industry has still paid out more in claims than it has taken in premiums every year since 1994.
A potential Competition Commission probe comes as Britain’s biggest insurer, Royal Bank of Scotland’s Direct Line Group, is preparing for a stock market flotation pencilled in for the second half of this year.
Other major British motor insurers include Aviva and RSA.
FROM: REUTERS
