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 Found considerable difference between Confused / Towers Watson premium tracker showing average premium of £652 in Q 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. oData 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 pre- requisite 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 Statutory deadline

Questions and discussion Contact details: Rob Cummings Manager, Civil Justice and Data Strategy Association of British Insurers