The Office of Fair Trading (OFT) has announced that after an investigation into the cost of repairs and temporary replacement vehicles it has decided to ask the Competition Commission to investigate whether the car insurance market is “dysfunctional”.

Chief executive of the OFT, John Fingleton, said there was no “quick fix” for the problem, which is why he wanted the Competition Commission to launch a full in-depth enquiry and that “Competition in this market does not appear to work well for drivers.”

The problem is, in part, caused by the fact that the insurance costs after an accident are born by the “at fault” drivers insurance company, but the costs themselves are set by the “no fault” drivers insurer, and that these costs may be artificially inflated. Insurers often receive a fee from the car hire firms and garages involved, and the OFT says this makes replacement car hire on average £560 more expensive, and repair costs £155 more expensive.

“Insurers of the not-at-fault driver and others, such as brokers, credit hire organisations and repairers, can take advantage of this lack of control as an opportunity to generate revenues through rebates and referral fees and so inflate the costs of insurers of at-fault drivers,” the OFT explained.

The additional costs add £255 million a year to insurance premiums, and so this could be good news for drivers, ultimately resulting in cheaper car insurance.

The decision to refer the car insurance market to the Competition Commission is provisional, and a final decision will be announced in October.