OFT ruins Direct Line’s day by referring insurance industry

Car insurance news roundup: week ended 3 oct 2012:

Direct Line’s plans for an IPO were ruined after the Office of Fair Trading sent the insurance industry to the Competition Commission for suspect practices.

The motor car insurance market is leaving consumers out in the cold by pushing premiums up by an extra £225 million on a yearly basis, according to the Office of Fair Trading, who has since referred the £9.4 billion insurance industry to the Competition Commission. The main complaint for the industry watchdog is that at-fault drivers had to relinquish control to their car insurance companies when it came to carrying out repairs to  vehicles involved in accidents and how not-at-fault drivers were provided replacement vehicles.

The OFT found that such practices could be increasing car insurance rates by around £10 a policy, precipitating its decision to change their provisional referral decision, reached back in may, to a definite one after further investigaton. The Competition Commission now has the next 24 months to report on any findings as to why competition may not be working in an effective manner within the car insurance industry.

This new decision comes at the worst possible moment for Royal Bank of Scotland, the owners of Direct Line insurance – exactly as they prepare to float the car insurance group on the stock market RBS is selling Direct Line in order to comply with EU regulators’ demands to repay the massive taxpayer bailout in 2008 – a move that left the bank 82 per cent taxpayer owned.

A spanner has definitely been thrust into the works by the OFT decision, according to financial market analyst, Eamonn Flanagon. Direct Line’s earnings outlook will most likely be affected by the fact that the Competition Commission will be investigating the entire insurance industry over the coming two years, Mr Flanagon said, adding that it could be a ‘struggle to justify’ the original estimated value for Direct Line, which stood at anywhere between £3 billion to £3.2 billion – a more realistic figure would be less than £2.7 billion, and perhaps significantly so.

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