Dual rate price cap will encourage insurers to accept liability for replacement vehicle costs within three days of receiving a claim

Credit hire rates could be reduced by as much as 50% under proposals put forward by the Competition and Markets Authority (CMA), formerly the Competition Commission.

The CMA is proposing a mandatory dual rate price cap on the price of providing a replacement vehicle, with the low rate cap equal to about half the current rate under the ABI’s general terms of agreement (GTA).

This low rate cap would apply if insurers accept liability for the costs of the replacement vehicle within three days of receiving the claim.

After this period a high rate cap would apply, which would be about equal to the rate under the current GTA voluntary protocol.

AXA underwriting managing director David Williams said “the devil is in the detail”, but at first glance, the cap was a “step in the right direction”.

The proposed price cap would initially be set by the CMA as an average of available direct hire rates and it is suggested that this be increased in line with either RPI or CPI with additional periodic reviews undertaken by the CMA.

The credit hire industry has previously raised concerns that prices used to calculate the cost of direct hire have been kept unsustainably low by direct hire companies, such as Enterprise Rent A Car, but the CMA said it had no concerns about competition in the direct hire market.

“There are several providers of direct hire and we have no reason to believe this market is not reasonably competitive,” it said.

The CMA said the adoption of this proposed remedy would help reduce frictional costs in the credit hire market as well as unduly long hire periods.

“Frictional costs are currently high under the GTA because prices are high and liability is often not agreed,” it said. “[This remedy is expected to] reduce frictional costs incurred by insurers and clams management companies/credit hire companies when there is a dispute over the vehicle provided.

“We expect that disputes over these issues (liability, hire duration and/or need) might also reduce because the lower hire rate payable is expected to reduce overall disputes.”