LONDON, Oct 4 (Reuters) - A planned competition probe of Britain's motor insurance market could reduce insurers' profits and hinder their ability to repay debt, credit rating agency Moody's said on Thursday.
"The Competition Commission's investigation is credit negative because at a minimum it will create uncertainty for the industry, and more significantly could result in lower motor premium rates," Moody's said in a report.
"A reduction in revenue from lower premiums would hurt profitability, particularly for those general insurers with the greatest market share in private motor insurance."
The Office of Fair Trading, a consumer watchdog, last week referred the motor insurance industry to the Competition Commission after concluding that ineffective competition was inflating drivers' insurance costs.
News of the probe coincided with efforts by Direct Line, Britain's biggest car insurer, to list on the stock market, and is likely to dampen appetite for its shares, analysts and investors have said.
The competition inquiry, which could take up to two years, will focus on how insurers provide replacement vehicles to customers involved in accidents they do not cause.
Regulators are concerned that insurers of blameless drivers pass their details on to car hire firms that charge above the market rate, accepting referral fees in return.
That inflates the claims bill of at-fault drivers' insurers, ultimately pushing up the premiums paid by motorists.
The competition watchdog could impose changes that would make it harder for insurers to boost their profits through fees for ancillary services such as replacement vehicles.
Direct Line's owner, Royal Bank of Scotland , is selling the insurer to win European regulatory approval for a government bailout during the 2008 financial crisis that left it 82 percent state-owned.
Direct Line's biggest rivals include Aviva , Admiral , RSA and Axa .
The group, expected to announce the price at which its shares will start trading next week, is currently rated A2 by Moody's, denoting a low risk of default.
(Reporting by Myles Neligan; Editing by Catherine Evans)
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