‘Competition in this market does not appear to work well for drivers. We believe the focus that insurers have on gaining the competitive edge through raising their rivals’ costs means that drivers pay more than they need to for their motor insurance policies’.
From John Fingleton. CE OFT
This idea was also the main thrust of the introduction of my Lyons Davidson presentation in April this year.
OFT have now realised that the reason it happens are structural rather than a result of collective action, but blaming insurers is compulsory in press statements these days. It is true that insurers gain more competitive advantage out of cost loading their competitors than they do out of being good insurers. A brief familiarity with economics leads to that conclusion. Compulsory 3rd party insurance has to develop that way if utility is to be optimised. It is inevitable and requires no collective decision of any sort.
My advice to the Lyons Davidson audience was that cost loading your competitors in a compulsory class is the most efficient way to gain competitive advantage (this year). If insurers weren’t already doing it then I would recommend it. It is unjust to the motorist of course, but that is a system design problem. System reform is long overdue.
I listed the opportunities for cost loading. Credit hire was rather small in my view, but easy to understand.
The bigger problems are in the medical arena. The cost of whiplash would roughly halve if the common law was faithfully applied in the medical advice received, and then, because its not worth the effort, fewer marginal cases would claim.
Strategy would be to reform the system (using credit hire as the cause célèbre) in such a way that the medical problems are also dealt with.
OFT have put structural reform on the agenda. They are to be congratulated for having the courage to do so.