LONDON, May 31: Britain’s car insurers look set to be investigated by anti-trust regulators after the Office of Fair Trading said ‘dysfunctional’ competition pushes up annual premiums by 225 million pounds ($349 million).
Insurers of drivers involved in accidents they did not cause earn fees by referring customers to replacement-car firms and repair garages, jacking up the bill paid by the at-fault driver’s insurer, said the OFT, a consumer watchdog.
‘Competition in this market does not appear to work well for drivers,’ chief executive John Fingleton said on Thursday, as the OFT provisionally called for a probe of the sector by the Competition Commission.
‘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 referring customers to replacement car firms that hire vehicles at high rates and for longer than necessary, jacking up the bill paid by at-fault drivers’ insurers, the OFT said.
Insurers of not-at-fault drivers also refer customers to repairers for a fee, further inflating competitors’ costs.
Analysts said a Competition Commission inquiry would make a ban on insurers earning referral fees more likely, potentially 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 2.6 percent by 0738 GMT, underperforming a flat FTSE 100 share index.
The OFT, which launched an investigation into the motor insurance market in December amid concern a lack of competition was pushing up premiums, said it would reach a decision on whether to refer the matter to the Competition Commission by October.
That potential investigation 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. ($1 = 0.6438 pound)
(agencies)
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