The Office of Fair Trading (OFT) has provisionally decided to refer the private motor insurance market to the Competition Commission (CC) for an in-depth market investigation, on the basis that it has reasonable grounds to suspect that there are features of the market that prevent, restrict or distort competition.

According to the OFT, it has found evidence that insurers of not-at-fault drivers and others (such as brokers, credit hire organisations and repairers) took advantage of the lack of control that insurers of at-fault drivers have over the way in which repairs and vehicle replacement services are carried out to generate revenues through rebates and referral fees and so inflate the costs of insurers of at-fault drivers. This in turn raises the total cost for providing private motor insurance, which drivers pay, with premiums potentially being pushed up by £225 million a year.

The OFT has stated that the market would work better if insurers competed primarily on the quality and value of the service each provides to insured drivers, rather than raising rival insurers’ costs and increasing intermediaries’ revenues.

The OFT considered similar issues in the insurance market in 2002, when it considered an agreement notified to it under the Competition Act 1998 by the Association of British Insurers.

The OFT is now consulting on its findings, and interested parties are invited to respond by 6 July 2012. Although this is just a provisional decision at this stage, the OFT’s practice following provisional findings suggests that it will go on to refer the matter to the CC. If the market is referred, the CC will have two years to conduct its investigation, following which it will have the power to impose a range of remedies to address any distortion of competition it finds. These include imposing undertakings on market participants to change their behaviour, banning specific practices or recommending legislative changes to the Government.

The provisional decision and other consultation materials can be accessed here.