The Office of Fair Trading has referred the car insurance industry to the Competition Commission following concerns motorists were being charged overly high premiums.
Clive Maxwell, OFT chief executive, said in a statement on September 28 there would be no quick fix to the problems and that a more in-depth investigation by the Competition Commission was therefore appropriate.
The Commission could take up to two years to report on its findings, meaning insurance premiums are unlikely to change in the short term.
The OFT had already provisionally decided to refer the market in May this year after a market study gave it reasonable grounds for suspecting that there are features of the market that prevent, restrict or distort competition and make it "dysfunctional".
Insurers of drivers responsible for an accident - the 'at-fault' drivers - have little control over the way repairs and replacement vehicles are provided to the 'not-at-fault' driver, according to the report's findings.
This may enable the insurers of not-at-fault drivers, and others such as insurance brokers, credit hire organisations and repairers, to engage in practices which result in the cost of replacement vehicles and vehicle repairs being higher than they need to be.
Press Association reported that the inflated cost of providing replacement vehicles is believed to be an average of £560 a time, while the cost of repairs was £155 more.
Many insurers of not-at-fault drivers, brokers and repairers, refer the drivers to organisations that charge higher rates in exchange for referral fees of around £250 to £400 per hire car.
An the bills paid by the insurers of at-fault drivers can be inflated further because not-at-fault drivers are given replacement vehicles for longer than necessary.
With repairs, bills paid by the insurers of at-fault drivers are pushed up because some insurers receive referral fees and rebates from repairers and suppliers, the OFT's initial report found.
And some insurers even have agreements with repairers to charge higher labour rates when repairing the vehicle of the not-at-fault driver.
How much are these practices ramping up your policy? Not by much; according to the report, the extra cost was £10 per policy, prompting Martin Andrews, director general of the Credit Hire Organisation, to suggest in several media outlets that "clearly the costs of any market dysfunctionality are not the reason for the recent rise in the cost of premiums".
The news of the price review comes on the eve of the EU Gender Directive coming into force in January 2013, which will prohibit insurers offering cheaper premiums to women on the basis that they're female.
Interestingly, data from Moneysupermarket.com last month showed car insurance policies had actually decreased in price this year by 10.6%.
After analysing more than 16 million car cover quotes over the last year, the comparison site found rates have dropped from an average £554 peak in April 2011, to an average £478 today.
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