Car insurance costs are set to be investigated after the Office of Fair Trading (OFT) found that 'dysfunctional' insurers could be costing drivers 225 million a year.
The OFT has found evidence that insurers are conspiring with garages and car-hire firms to create extra revenue through inflated prices and referral fees paid by the at-fault driver's insurance.
Findings from the OFT's study revealed that these practices made hiring a courtesy car around 560 more expensive, while repair costs were inflated by an average of 155. The extra cost is paid by the at-fault driver's insurance, but is then recouped in the form of higher premiums.
The OFT said: 'On the basis of the evidence collected, the OFT has reasonable grounds to suspect that there are features of the private motor insurance market that prevent, restrict or distort competition.
'The market would work better if insurers competed primarily on the quality and value of the service each provides to insured drivers, rather than focusing on gaining the competitive edge through raising rival insurers' costs and increasing their own revenues.'
Despite the evidence, the OFT's decision to refer the car insurance industry to the Competition Commission is currently only provisional, which allows interested parties time to make responses before a final decision is announced in October.
The Government revealed earlier this year that it would take action to tackle the amount of fraudulent whiplash claims that were said to add around 40% to the cost of insurance premiums. However, the Transport Select Committee later found the figure to be closer to 12%.