The insurance industry has been warned that stability must return to the liability market within 18 months, or face heavy scrutiny from watchdogs.
Office of Fair Trading (OFT), director of markets and policy initiatives Jonathan May said, despite finding no evidence of insurer collusion in its review of the liability market, it would keep the sector under review.
It concluded that rises in premiums were due to higher claims and legal costs, lower investment returns, and reduced market capacity following the demise of Independent Insurance.
But May said the OFT expected these factors to cycle through the market over the next year, and it would look again to see if premiums had stabilised in the second half of 2004.
"If we don't find that to be the case we'll have to consider what further action we could take." He said that, at that point, if premiums had continued to rise, the OFT could refer insurers to the Competition Commission.
Biba said the plan to keep the market under review "can only be welcomed".
The OFT and the Department for Work and Pensions (DWP), in its review of the employers' liability (EL) sector, have also reiterated the FSA's warning to Biba and the ABI over their inability to agree on a set of industry service standards. The FSA is considering introducing regulations on the issue of renewal terms, while the DWP said it would "seek to raise service standards, including minimum notice periods for policy renewals". In its report, the OFT said that the minimum notice period should be at least 21 days.
A meeting between the ABI and Biba is scheduled for 20 June to discuss the issue.
The DWP recommended a range of short term measures (see box) but will report again in autumn on increasing the role of rehabilitation in compensation, and on the possibility of separating long-tail occupational disease from accident risks, a measure that has been advocated by the ABI.
A DWP spokesman said: "More evidence would be required" into the merits of separating long-tail diseases as "it is a pretty radical move".
ABI head of general insurance, John Parker said the ABI will commission consultants to produce a "major piece of work" on establishing a long-tail fund. He said, on the whole, both reports findings were "sensible".
The DWP's autumn report will also examine legal costs to consider faster and more cost-effective dispute resolution measures.
The issue of legal costs was also raised by the OFT, which is considering looking into the cost impact of conditional fee arrangements and the Woolf Reforms on insurers in the next few months.
This could result in another major study, which would not be completed until mid-2004. But the recent collapse of conditional fee specialists The Accident Group (see page 1), and Claims Direct last year could signal a sea change in the area of legal costs.
A tale of two reviews
DWP review key points
Short term measures:
OFT review key points