The Office of Fair Trading (OFT) today referred the motor insurance industry to the Competition Commission after finding that motorists are being charged too much after an accident.
The OFT provisionally decided to refer the market in May this year after a study found evidence that competition was prevented, restricted or distorted.
Drivers responsible for an accident appeared to have little control over the way repairs and replacement vehicles are provided to the not-at-fault driver, the OFT concluded. This allowed insurers, credit hire organisations and repairers to inflate costs artificially.
May's report found that insurance companies were inflating premiums for drivers by £225m a year in total through 'dysfunctional' practices.
Clive Maxwell, OFT chief executive, said: 'Competition appears not to be working effectively in the private motor insurance market. The insurers of at-fault drivers appear to have little control over the bills they must pay, and this may be leading to higher costs for them and ultimately higher premiums for motorists.'
He added: 'Having publicly consulted on our provisional decision, we are still of the view that there is no quick fix to these problems, and that a more in-depth investigation by the Competition Commission is therefore appropriate.'
The commission has up to two years to report its findings and has the power to impose remedies if it finds that insurance companies are deliberately harming competition. The Association of British Insurers (ABI) welcomed the announcement and said insurers had faced inflated rates for credit hire cars and excessive hire periods.
Nick Starling, director of general insurance at the ABI, said: 'Regulation of all players in the market to tackle excessive costs is needed, and we look forward to working with the Competition Commission to bring much-needed reforms to the market.'