Motorists are being ripped off to the tune of £200m each year as a result of "unnecessary costs" being heaped on to them after accidents, the Competition Commission has warned.
Britain's 25 million motorists have been paying £8 extra per policy because of expensive replacement cars and repairs, which are often not up to scratch. Although these costs are initially borne by the insurers of drivers responsible for accidents, they are feeding through to the wider market.
Alasdair Smith, the deputy chairman of the commission, said: "In most cases, the party managing the accident claim, typically a non-fault insurer or intermediary, is not the party liable to pay the costs of the claim. There is insufficient incentive for insurers to keep costs down even though they are themselves on the receiving end of the problem.
"We are now considering a range of possible measures, some of them far-reaching reforms, to ensure that the market better serves the interests of customers."
Ahead of a full report next year, the regulator said it was considering a range of measures, including limiting the cost of replacement vehicles.
The commission has been studying the multibillion- pound motor insurance market for more than a year following a referral from the Office of Fair Trading.
In response, James Dalton, head of motor at the Association of British Insurers said: "As an industry we remain absolutely committed to improving the car insurance market for hard-pressed motorists.
"We look forward to continuing to engage with the Competition Commission as it carries forward its work and we hope this will lead to further improvements... and lower premiums for customers."
The commission is also concerned about the relationship between price-comparison websites and insurers, claiming that drivers often struggle to identify the best value products.
Graeme Trudgill of the British Insurance Brokers' Association welcomed any new regulations relating to comparison sites.
"If a customer walks into a broker's office, we believe they should be able to offer the premium at a cheaper price. Comparison websites typically charge around £40 to £50 per lead and this saving could be passed on to customers," Mr Trudgill said.
However, Peter Plumb, chief executive of moneysupermarket.com, claimed that too many restrictions on comparison sites would have an impact on premiums.
"Some price-comparison website competitors have tried to stop us by using clauses that force price parity across all price-comparison websites and therefore prevent an insurer offering a lower premium through us," he said.