Car insurance market faces overhaul

After a lengthy inquiry which began in 2012, the Competition and Markets Authority (CMA) finally handed down the verdict on the £11bn private motor insurance market.
It has banned exclusive pricing deals between motor insurers and price comparison sites, citing these deals were preventing insurers from making their products available more cheaply elsewhere online. According to the AA motoring organisation, this change could save motorists around £20 a year. Given the small impact on insurance premiums, many are asking whether such a long and costly inquiry was necessary.

The inquiry took place upon recommendation from the Office of Fair Trading (OFT). It has been a commonly held perception that many motorists in the UK are simply paying too much for their car insurance due to the way the insurance industry works.

“Price parity” agreements restrict competition

Although online price comparison tools do help motorists to shop around for the best deal on a particular website, the way they operate also prevents prices from becoming lower. This is because deals between insurers and these comparison websites, called “price parity” agreements, basically restrict competition and result in higher premium overall. Under these contracts, insurers are unable to offer lower quotes on other online platforms.

Since motorists are often encouraged to use online comparison tools to find the best deal, many actually end up paying a higher premium than they need to.

Transparency around add-on products

Another key recommendation to have come out of the inquiry is the need for clearer information about add-on products for car insurance policies.

The CMA has called for the Financial Conduct Authority (FCA) to consider how drivers could be better informed in making their choices when it comes to add-ons. Their particular concern is around the no-claims-bonus protection, where both the pricing and benefits of this product can be confusing for consumers.

Car hire and repair charges remain unresolved

One area of disappointment for those lobbying for sweeping changes to the motor insurance industry concerns the issue around car hire and repair charges.

There has been speculation that premiums are being pushed up because when the insurer of a driver not at fault in an accident arranges a replacement car or repairs, the at fault driver’s insurer has to settle the bill. The concern is that some replacement vehicle providers and repair centres are inflating charges at the consumer’s expense.

In this regard, the CMA has concluded that it cannot find an effective way to address this issue without a fundamental change in the law. Since the problem is not as widespread as originally thought, the CMA sees no benefit in pursuing such a radical measure. It has been suggested that the effect of car hire charges on premiums is only around £3 a year.

This news was a welcome relief for car companies that provide replacement vehicles, though many are concerned at the lack of protection for honest motorists.

Although some changes are expected in the motor insurance industry, it seems that most of us will not see a significant difference to our insurance premiums for the time being. Since motor insurance will remain a big cost for car owners, anyone with an old or damaged vehicle may wish to consider scrapping it through BMS Salvage instead of footing the bill for an expensive motor insurance policy.