Car insurers have welcomed the news that their industry is being referred to the Competition Commission.
Despite accusations that the £9bn market is "dysfunctional", the Association of British Insurers (ABI) said the investigation would "bring much-needed reforms to the market that will, in turn, result in lower car insurance premiums for consumers".
The Office of Fair Trading (OFT) signalled its intention to refer car insurers to the Commission back in May.
Clive Maxwell, the OFT's chief executive, said: "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 appropriate."
The OFT found evidence that insurers compete in a dysfunctional way that may push up premiums for drivers by £225m a year. It said many outside parties, such as brokers, credit hire organisations and repairers, could boost their income through rebates and referral fees. In short, the process leads to rip-off repair bills inflated on average by £155 each time. Meanwhile, the cost of providing replacement vehicles costs an extra £560 for each vehicle, the OFT reckoned.
There was also evidence that some insurers took referral fees of up to £400 a time for using favoured repairers and hire companies.
The various unfair processes add an extra £10 a year to the average cost of insuring a car.
Nick Starling, director of general insurance at the ABI, said: "The OFT found what insurers have known for years: that when a customer has a crash that is their fault, the insurer has little control over the cost of the subsequent claim. In particular, 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." He said regulation of all players in the market to tackle excessive costs is needed.
Martin Andrews, director general of the Credit Hire Organisation, said the OFT estimate that market dysfunctionality costs customers £225m represents less than 2 per cent of the insurers' total annual spend of £13bn. "Quite clearly the costs of any market dysfunctionality are not the reason for the recent rise in the cost of premiums," he said.
Moneysupermarket said that the average cost of car insurance reached a peak of £554 in April 2011. "Since then average car insurance premium prices have mostly been decreasing and now stand at an 18-month low of £478 a year," said Kevin Pratt of the comparison site.
The Competition Commission has up to two years to report its findings.
Direct Line to be valued at up to £2.9bn
Royal Bank of Scotland yesterday launched its forced flotation of its Direct Line insurance arm, valuing the business at between £2.4bn and £2.9bn, slightly lower than expectations.
The state-owned bank will initially sell up to a third of its stake in the insurer, which runs the Churchill, Privilege and Green Flag brands as well as Direct Line. Shares in the split-off group will conditionally trade on the stock market from 11 October, at an initial price of between 160p and 195p each.
After yesterday's referral of the motor insurance market to the Competition Commission, Direct Line said: "We have co-operated fully with the OFT and welcome working with the Competition Commission going forward."