Insurers have welcomed the decision of the Office of Fair Trading to refer the credit hire and credit repair markets to the Competition Commission.
The OFT said it has found evidence that insurers compete in a dysfunctional way that may push up premiums for drivers by £225 million a year.
Nick Starling, Director of General Insurance at the Association of British Insurers, said:
"The ABI welcomes today's announcement on the referral of the credit hire and credit repair markets to the Competition Commission for investigation. We had called for this.
"For too long insurers have faced inflated rates for credit hire cars and excessive hire periods which have led to higher insurance premiums for customers.
"Regulation of all players in the market to tackle excessive costs is needed, and we hope that the work by the Competition Commission will bring much needed reforms that in turn will result in lower car insurance premiums for consumers".
The OFT said that after a road traffic accident, the at-fault driver's insurer is responsible for meeting the cost of repairs and replacement vehicles for the not-at-fault driver. However, in its market study published today, the OFT found evidence that insurers of at-fault drivers have little control over the way in which these repairs and vehicle replacement services are carried out or the associated costs.
John Fingleton, Chief Executive of the OFT, said:
"Competition in this market does not appear to work well for drivers. We believe the focus that insurers have on gaining the competitive edge through raising their rivals' costs means that drivers pay more than they need to for their motor insurance policies.
"Because insurers are distracted from competing primarily on the quality and value of service provided to insured drivers, incentives for greater efficiency may be reduced.
"There does not appear to be an appropriate, quick fix to these problems. We have provisionally decided that a more in-depth investigation by the Competition Commission, which has a range of additional tools at its disposal, may be necessary."