Appendices & Glossary

496 Pages·2014·6.57 MB·English

APPENDIX 1.1
Terms of reference and conduct of our investigation
Terms of reference
1. On 28 September 2012, the OFT made the following reference:
A1. The OFT, in exercise of its powers under Section 131 and 133 of the
Act, hereby makes a reference to the CC for an investigation into the
supply or acquisition of private motor insurance and related goods or
services in the UK.
A2. The OFT has reasonable grounds for suspecting that a feature or a
combination of features of the market or markets for the supply or
acquisition of private motor insurance and related goods or services in the
UK presents, restricts or distorts competition in connection with their
supply or acquisition.
A3. For the purposes of this reference, ‘private motor insurance’ means
insurance cover against damage to property and personal injury that is
supplied to or acquired by drivers of privately-owned motor cars designed
and used for non-business (private) use. It excludes motorcycles.
Clive Maxwell
CEO
28 September 2012
Conduct of our investigation
2. On 1 October 2012, we published on our website an invitation to express
views to us, and on 12 December 2012, we published an administrative
timetable (since revised) for our investigation.
3. We have gathered a wide range of information from relevant parties. We
have:
 requested initial submissions from interested parties
 published an issues statement and received submissions on this document
 issued many information requests to parties
 attended site visits
 held hearings with many parties at various stages in the process
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 held staff-level meetings with some parties on specific topics at various
stages in the process
 consulted on and commissioned a consumer survey from IFF
 consulted on and commissioned a study involving post-repair vehicle
inspections from MSXI
 published a number of working papers, together with an annotated issues
statement, and received submissions on these documents
 published our provisional findings and a notice of possible remedies and
received submissions on these documents
 published our provisional decision on remedies and some further working
papers and received submissions on these documents
4. We have published on our website non-confidential versions of the
submissions we received as initial submissions and in response to our issues
statement, annotated issues statement and working papers, provisional
findings and notice of possible remedies, and provisional decision on
remedies, along with summaries and transcripts of our hearings.
5. We have published on our website a non-confidential version of our final
report.
6. We would like to thank all those who have assisted in our investigation.
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APPENDIX 2.1
PMI price trends
Introduction
1. This appendix sets out data on trends in the price of PMI. It considers four
main sources of such data:
(a) Office for National Statistics (ONS) consumer price index;
(b) AA premium indices;
(c) Confused.com/Towers Watson car insurance price index; and
(d) ABI average motor insurance premium tracker.
ONS consumer price index for transport insurance
2. The ONS publishes a monthly index of consumer prices (CPI), which is the
main UK measure of inflation. The ‘all-items CPI’ reflects price changes
across the economy weighted by expenditure. In the CPI, all categories of
expenditure on which significant amounts of money are spent are arranged
into 12 divisions, which are subdivided into groups and then into classes.
Price indices are published for each class, one of which is transport
insurance.
3. The transport insurance CPI reflects price changes in car insurance and travel
insurance.1 Within the transport insurance CPI, car insurance price changes
are weighted by 95% and travel insurance price changes by 5%. Because of
the very high weight of car insurance in the transport insurance CPI, it can
serve as a proxy for trends in PMI prices. The ONS calculates the change in
car insurance prices by comparing a large number of quotes on car insurers’
websites.
4. Figure 1 shows the trend in the transport insurance CPI since January 1996
and compares it with the CPI for all items. Over the period as a whole,
transport insurance prices (predominantly reflecting car insurance prices)
have increased much faster than prices generally: compared with January
1996, the transport insurance CPI is now over twice the level of the all items
CPI, with rapid increases during 1998 to 2001 and especially in 2009 to 2010.
By contrast, the CPI for home contents insurance (also shown in Figure 1)

1 Travel insurance has been included in transport insurance since 2000.
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has increased broadly in line with the all items CPI, suggesting that the
longer-term increase in transport insurance prices has been driven by factors
which have been specific to transport insurance (eg PMI claims costs) rather
than general to insurance (eg administration costs). We discuss trends in PMI
claims costs in paragraphs 2.42 to 2.46.
FIGURE 1
CPI, January 1996 = 100
400
350
300
250
200
150
100
50
Transportinsurance Allitems House contentsinsurance
0
94 94 95 95 96 96 97 97 98 98 99 99 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11 11 12 12 13 13
May Nov May Nov May Nov May Nov May Nov May Nov May Nov May Nov May Nov May Nov May Nov May Nov May Nov May Nov May Nov May Nov May Nov MayNovMay Nov May Nov
Source: ONS.
5. Figure 2 shows the annual percentage change in the transport insurance CPI
compared with the all items CPI. Figure 2 illustrates the significant fluctuations
in the transport insurance CPI compared with the all items CPI.
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FIGURE 2
CPI, percentage change over 12 months
50
Transportinsurance Allitems
40
30
20
%
10
0
–10
–20
Apr S9e5p F9e5b J9ul6 D9e6c M9a6y O9c7tM9a7r A9u8g J9a8n J9u9n N9o9v A9p9r S0e0p F0e0b J0ul1 D0e1c M0a1y O0c2tM0a2r A0u3g J0a3n J0u4n N0o4v A0p4r S0e5p F0e5b J0ul6 D0e6c M0a6y O0c7tM0a7r A0u8g J0a8n J0u9n N0o9v A0p9r S1e0p F1e0bJ1u1lD11ecM1a1y O1c2tM1a2r A1u3g J1a3n 14
Source: ONS.
AA price indices for car insurance
6. The AA publishes a British Insurance Premium Index, the purpose of which is
to provide a general market overview of new policy premium movements. The
AA said that its index recorded car insurance premium movements for 2,800
car insurance ‘customers’ throughout the UK, from the websites of around
80 providers. The premiums were averaged to provide a market ‘average
quoted premium’. The AA’s premium data also covers home insurance, for
which the AA stated that average movements were calculated from 750
customers, in each basket of risks separately for buildings, contents and
combined covers, based on data from about 70 insurers, brokers and
schemes.2
7. Figure 3 shows the AA indices together with the all items CPI. The overall
pattern is similar to that shown in Figure 1, with car insurance prices having
increased much more rapidly than prices generally over the longer term. The
AA data shows more extreme movements than the CPI measure; in particular,

2 AA British Insurance Premium Index.
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it shows a larger increase in prices over 2009/10 and a larger decline in the
last two years.
FIGURE 3
AA insurance price indices (and CPI all items index), January 1996 = 100
600
PMI comprehensive PMITPFT CPI allitems
Homebuildings Homecontents
500
400
% 300
200
100
0
2 4 2 4 2 4 2 4 2 4 2 4 2 4
Q Q Q Q Q Q Q Q Q Q Q Q Q Q
4 5 7 8 0 1 3 4 6 7 9 0 2 3
9 9 9 9 0 0 0 0 0 0 0 1 1 1
9 9 9 9 0 0 0 0 0 0 0 0 0 0
1 1 1 1 2 2 2 2 2 2 2 2 2 2
Source: AA (and ONS for the CPI).
8. Figure 4 shows the annual percentage change in the AA’s car insurance price
indices compared with the all items CPI.
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FIGURE 4
AA car insurance price indices (& CPI all items index):
percentage change over 12 months
70
PMI comprehensive PMITPFT CPI allitems
60
50
40
30
% 20
10
0
–10
–20
–30
2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 4
Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
19951995199619961997199719981998199919992000200020012001200220022003200320042004200520052006200620072007200820082009200920102010201120112012201220132013
Source: AA (and ONS for the CPI).
9. The AA price indices shown in Figures 3 and 4 are calculated as an average
across all providers for which data is available. The AA also published a
‘shoparound’ index, which was based on the average of the cheapest five
premiums returned for each ‘customer’ in each basket of risks. The AA stated
that this was closer to what customers paid for their cover. Additionally, the
AA calculated prices from PCW data (whereas the price indices in Figures 3
and 4 were calculated from provider data). The overall trend suggested by the
‘shoparound’ and PCW indices in recent years appears similar to that
suggested by Figures 3 and 4, though the recent price decline is slightly
smaller (on comprehensive policies in Q1 2014 it is 15% for the PCW data3
and 19% for the ‘shoparound’ data from providers’ websites compared with
21% shown in Figure 4). The AA’s data shows a ‘shoparound’ average
premium in Q1 2014 of £663 based on provider data and £475 based on
PCW data.

3 The AA calculates both a market and a ‘shoparound’ average for the PCW data but they are similar.
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Confused car insurance price index
10. Confused, in association with Towers Watson (an insurance risk management
specialist), has calculated a car insurance price index since 2009, covering
the period since Q4 2006.
11. Confused said that its car insurance price trends were calculated from real
quotes for comprehensive insurance given to its customers. The figures used
were based on the average of the five lowest quotes received by the
customer. Towers Watson then applied weightings to the data, so that the
results reflected the entire market, rather than the particular demographic of
Confused’s customer base.
12. Figure 5 shows the Confused/Towers Watson data.4 Figure 5 shows a broadly
similar trend in car insurance prices since Q4 2006 to Figures 3 and 4 based
on AA data.
FIGURE 5
Confused/Towers Watson car insurance price index

Source: Confused/Towers Watson.
ABI average motor insurance premium tracker
13. The ABI recently started publishing quarterly estimates of the average
comprehensive PMI premium. The ABI tracker reflects average GWP per
policy each quarter for comprehensive PMI policies, excluding optional policy

4 Confused.com car insurance price index trends.
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add-ons (such as breakdown cover and MLEI) and insurance premium tax.5
The ABI told us that each ABI member which offers comprehensive PMI was
requested to provide data. It estimated that the results covered around 90% of
the PMI market written by insurance companies authorised in the UK (based
on 2012 data).
14. Figure 6 shows the data published by the ABI, which covers the period since
2012. By comparison with the Confused/Towers Watson and AA data, the ABI
data shows a somewhat lower decline in premiums since the second quarter
of 2013 (though it also shows a lower level of average premium). This is likely
to be because the ABI index is based on average prices paid, rather than
quotations, and hence reflects movements in premiums for renewals as well
as new policies.
FIGURE 6
ABI average motor insurance premium tracker

Source: ABI.
Summary
15. Data on PMI premiums suggests that over the longer term the price has
increased faster than general inflation. There was a particularly rapid increase
during 2009/10 but since 2011 there has been a fall in PMI premiums.
16. Similar data for house insurance shows that premiums have not increased
faster than general inflation, suggesting that the longer-term increase in PMI
prices has been driven by motor-specific factors (eg PMI claims costs) rather
than factors general to insurance.

5 ABI average motor insurance premium tracker - Q2 2014 data.
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APPENDIX 2.2
Background to credit hire companies
Introduction
1. CHCs are organisations which provide temporary replacement vehicles on a
deferred payment basis.
2. Following an accident, a claimant may be referred to a CHC by their insurer or
broker (or dealership, repairer, etc), or may engage with a CHC directly. The
CHC will seek to assess liability for the accident (repeating some of the FNOL
process which the claimant has already conducted with their insurer/broker). If
the CHC believes that the claimant was not at fault, it may provide the
claimant with a temporary replacement vehicle.
3. According to the Credit Hire Organisation (CHO), there are up to 100 CHCs in
the UK, the majority of which are very small. We found that the five largest
CHCs (Accident Exchange, Claimfast, Enterprise, Helphire and Quindell)
accounted for about 80% of the credit hire market (by value of claims), while
the ten largest CHCs (also including CCL Vehicle Rentals, Crash Services,
EasiDrive, Kindertons and WNS) represented more than 90% of the market.
More information on the number and value of the claims handled by CHCs is
in the annex.
Services provided
4. A CHC provides a non-fault claimant with three services:
(a) vehicle hire, ie a temporary replacement vehicle;
(b) deferred payment, ie the claimant does not need to pay for the vehicle
hire upfront but assumes liability for this cost; and
(c) claims handling, ie the CHC will pursue the at-fault insurer for the cost of
the services provided to the non-fault claimant on the claimant’s behalf.
5. The non-fault claimant customer enters into a credit hire agreement with a
CHC. The terms and conditions of each credit hire agreement differ between
CHCs but, typically, although the hirer remains liable to pay the credit hire
charges, they authorise the CHC or a representative (eg a solicitor) to pursue
the claim with the at-fault insurer. They also authorise any settlement monies
to be paid to an account nominated by the CHC. CHCs told us that if the costs
could not be recovered from the at-fault insurer (eg due to a change in the
assessment of liability) it was very rare for a claimant to be asked to repay the
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