Manchester Claims Association lecture
The Competition Commission’s PMI
investigation and Credit Hire
Rob Cummings,
Manager, Civil Justice and Data Strategy
Association of British Insurers
6th March 2014
Overview
• Background
OFT call for evidence and Market Study
• Competition Commission’s PMI
investigation
Provisional findings
Potential Remedies
• ToH1: Separation of cost liability and cost
control
• Summary
• Next steps for Competition Commission
Office of Fair Trading
• OFT Call for Evidence – Sep 2011
• OFT Market study which focused on “the provision of third
party vehicle repairs and credit hire replacement vehicles
to claimants” – Dec 2011
• OFT reports back in May 2012, finds that:
•
•
Insurers of at fault drivers are often unable to exercise choice over how vehicle
repair and the provision of replacement vehicles are provided and have difficult in
assessing whether the costs associated with providing these services are
reasonable.
Insurers of non-fault drivers, brokers, credit vehicle providers, credit repairers and
others that supply services to insurers have the opportunity and incentive to take
advantage of the at fault driver’s insurer’s lack of control over costs by carrying out
practices enabling them to generate revenue through referral fees or rebates
whilst simultaneously inflating costs to the at fault insurer.
Competition Commission’s investigation
into the private motor insurance (PMI)
market in the UK
Summary of key provisional findings
•
25.7 million privately registered vehicles as at 31/12/12 and GWP
for private motor insurance was just over £10 billion in 2012.
•
Found considerable difference between Confused / Towers
Watson premium tracker showing average premium of £652 in Q3
2013 and AA at £568 and premium data from the 10 largest
insurers (redacted). CC noted that they “do not have an
explanation” for the difference.
•
The 10 largest motor insurers provided the CC with financial data
for the 5 years ended 31/12/12 – on average motor insurance
activities were loss making with an un-weighted COR of 112.
Summary of key provisional findings (II)
•
The average cost of a replacement car paid by insurers was substantially
greater when there was separation:
o
A comparison for 5 insurers showed an average replacement car cost in
2012 of around £1400 when there was separation compared with £480 for
captured claims and £370 when the at fault and non-fault drivers had the same
insurer.
o
The average credit hire duration was 3.7 days (31%) longer with separation
than on direct hire.
o
Data from 7 CHOs showed an average credit hire charge of around £1100
which was 2.5 times higher than the average rate direct hire rate paid by 3
insurers for similar cars.
•
The average cost of a replacement car was £1100 which was £640 higher
than the cost of a similar car in the absence of separation. Of this £640,
around £340 is paid out in referral fees to non-fault insurers.
Potential Remedies
Potential remedies focusing on four theories of harm:
• ToH 1: Separation of cost liability and cost control
• ToH 2: Possible under provision of service to those
involved in accidents
• ToH 4: Add-ons
• ToH 5: Most favoured nation clauses in PCW and
insurer contracts
ToH 1: Separation of cost liability and cost
control
A number of remedies have been proposed in order to
address this theory of harm:
• 1A: first party insurance for replacement cars
• 1B: at-fault insurers to be given the first option to handle
non-fault claims
• 1C: measures to control the cost of providing replacement
cars to non-fault claimants
• 1D: measures to control non-fault repair costs
• 1E: measures to control non-fault write-off costs
• 1F: improved mitigation
• 1G: prohibition of referral fees
1A: First party insurance for replacement cars
Under the proposed First Party model:
• TRVs, but not repairs, would be insured on a first party
basis such that a policyholder is provided with a TRV by
the policyholder’s own insurer in the event of an accident,
whether the policyholder is at fault or not;
• there would be no subrogation; and
• Consumers would have the ability to opt out of or select a
more basic level of TRV coverage or choose a TRV which
was not equivalent to their damaged vehicle in return for a
lower premium.
1A: First party insurance for replacement cars (II)
A number of benefits of this:
• Insurers would be liable for the costs of providing
replacement cars to their own customers, creating stronger
incentives to procure TRVs as efficiently as possible.
• Consumers would be likely to benefit from enhanced
choice, as they would be free to choose their own level of
replacement vehicle cover. However, sufficient information
would be required for claimants to enable them to make
informed choices regarding how to progress their claim.
1A: First party insurance for replacement cars (III)
But a number of important areas to consider further:
•
The length it would take to implement and operationalise the
required legislative changes.
•
The potential for the Remedy to lead to an increase in the number
of customer complaints, as customers opt out of what was a legal
entitlement.
•
Concerns that a number of unintended consequences could arise
from the first party model. For example, where a motorist does not
get the benefit of a hire vehicle for whatever reason, would they be
permitted to maintain a claim for loss of use? Would they be able
to claim for the cost of alternative transport arrangements?
•
This remedy (if subrogation is not permitted) could have the effect
of penalising safe drivers at the expense of those who cause
accidents.
•
What would be the impact on repair?
1A: First party insurance for replacement cars
(IV)
Issues for further consideration:
• Policy cover, potential for like for like cover as
standard?
• With or without subrogation
1B: At-fault insurers to be given the fist
option to handle non-fault claims
Under Remedy 1B, at-fault insurers would be given the first option to handle either the
whole of the claim or only the TRV element of the claim.
The CC provides five variants of this remedy:
(i) AF insurers have first option to handle the entire NAF claim (repair and TRV), with
customers retaining the final choice of provider;
(ii) AF insurers have first option to handle the entire NAF claim (repair and TRV), with
customers having no choice of provider if the AF insurer takes up this option;
(iii) AF insurers have first option to handle the TRV element only of a NAF claim, with
customers retaining the final choice of provider;
(iv) AF insurers have first option to handle the TRV element only of a NAF claim, with
customers having no choice of provider if the AF insurer takes up this option;
(v) AF insurers have first option to handle the TRV element only of a NAF claim, with
customers retaining the final choice of provide
1B: At-fault insurers to be given the fist
option to handle non-fault claims (II)
There are a number of issues with this remedy:
• There is clear risk of significant delay in the claims process.
Where roadside assistance is needed and a TRV is required
immediately,
there
are
concerns
over
customers
experiencing unnecessary delays.
• Issue of dispute about liability or split liability. Fault is often
not immediately clear at this stage in the claims process.
• If a non-fault claimant is given a choice over which provider
to use following an accident, they are likely choose their own
insurer, thereby not removing the separation of liability and
cost.
1C: Measures to control the cost of providing
a replacement car to non-fault claimants
This remedy would effectively replace the current General Terms
of Agreement (GTA) and under the CC’s proposals this could
comprise four elements:
• Guidance on the duration of hire periods for replacement cars
• A cap on daily hire rates of each category of replacement car,
set by an independent body
• An allowance for administrative costs
• Introduction of a Portal to help settle claims and remove
frictional cost
1C: Measures to control the cost of providing
a replacement car to non-fault claimants (II)
There are a number of key features that this model would need to include:
•
•
•
•
•
Would need to be a mandated solution with participation being a prerequisite for all players in the market.
An independent body would set the hire rates for credit hire TRVs, with
judicial guidance potentially being required.
Guidance on hire duration as well as rates.
Insurers monitoring the hire period so that it does not extend
unnecessarily.
Administrative costs should not be allowed, as such costs are
incorporated into the price of the vehicle.
1C: Measures to control the cost of providing a
replacement car to non-fault claimants (III)
Key issues to consider further:
• The composition of an independent body and how they go
about setting the rates.
• Circumvention issues: Repair could be delayed for a number
of reasons, effectively extending the hire period.
• Controlling repair duration. There are many examples of
problems relating to the hire period.
1D: Measures to control non-fault repair
costs
The CC considered two possible ways in which this aim could be
achieved through an enforcement order:
Remedy 1D(a) - Non-fault insurers would only be able to recover from at-fault insurers
the wholesale price they pay to repairers, plus an allowance, for an administration
charge.
Remedy 1D(b) - The repair costs recoverable through subrogated claims would be
limited to standardised costs. If the actual repair cost was higher than the standardised
cost, then the non-fault insurer would not be able to recover that additional cost.
Conversely, if the actual repair cost were lower than the standardised cost, the benefit
could be retained by the non-fault insurer.
1D: Measures to control non-fault repair
costs (II)
Issues to consider further:
• A number of practical difficulties in determining and
applying what the appropriate “wholesale price” or
“standardised cost” should be in any given claim.
• To what extent should efficient insurers be able to retain
the efficiencies they have achieved through their
economies of scale.
• To what extent can standardised costs for repairs be
established.
1E: Measures to control non-fault write-off
costs
The aim of the CC’s remedy is to ensure that subrogated claims for
a vehicle loss reflect the actual salvage proceeds. The CC considers
two possible ways in which this could be achieved:
Remedy 1E(a): Require that the at-fault insurer be given the option to handle the
salvage of the non-fault vehicle write-off (but only once the pre-accident value of the
vehicle has been agreed by the claimant/ non-fault insurer.
Remedy 1E(b): Require that all insurers use actual salvage proceeds (including any
referral fee paid by the salvage company to the insurer) or that the amount of the
subrogated claim on the at-fault insurer based on the estimated salvage value is
adjusted (up or down) once the actual salvage proceeds (and any referral fee) have
been received from the salvage company.
1E: Measures to control non-fault write-off
costs (II)
Key issues to consider further:
1E(a) potential to increase the cost of claims due to the
delays associated with the transfer of ownership, storage
fees and a consequential depreciation in salvage value
1E(b) could mean that benefit of efficiencies within the market
and defining precisely what is meant by ‘actual salvage
proceeds’ will be challenging
1F: Improved mitigation
This remedy is aimed at improving the obligation on the non-fault
insurer (or third party handling the claim) of managing mitigation in
relation to the need for a TRV.
Key issues to consider further:
• How to develop a standard and mandatory question set, which all
hirers must read and complete.
•
How to determine what is a genuine need and what is an alleged need
which is insufficient to properly justify a hire vehicle or a like-for-like
hire vehicle.
•
Potential for a standard set of questions produced to evidence need
to to result in the development of a set of standard response.
1G: Prohibition of referral fees
Key issues to consider:
• A ban would only work with a commensurate lowering of
the daily rate of credit hire TRVs. It would have little impact
in working in isolation.
• Needs to be part of an effective package of measures
incorporating a combination of the approaches set out in
remedies 1A, 1C, 1D and 1E.
• An explicit prohibition has the advantage of making clear
the intention that parties in the supply chain should not
incentivise practices that ultimately increase the cost of
insurance to consumers.
• Potential for circumvention and how this can be managed.
Summary
• A number of pros and cons in relation to a first party model for
TRVs and clearly a number of issues still to be addressed
• 1B would likely represent a poor customer journey and provides
too many practical challenges to be feasible
• 1C has strong potential and is arguably the easiest to implement
but is it a long term solution?
• Subrogation of repair remains an issue where there are differing
amongst insurers
• Support across the industry for a ban on referral fees
Next Steps
• Competition Commission has just completed second
round of oral evidence sessions
• May/June - Provisional decision on remedies
• July - Deadline for all parties response to provisional
decision on remedies
• August - Final deadline for all parties
responses/submissions
• 27 September 2014 - Statutory deadline
Questions and discussion
Contact details:
Rob Cummings
Manager, Civil Justice and Data Strategy
Association of British Insurers
[email protected]