Motor insurance premiums are unnecessarily high for all drivers owing to the complex chain of claims, the Competition Commission has said.
The higher premiums come from the cost of replacement cars and repairs which is paid by the insurers of at-fault motorists.
The Commission discovered that post-accident repairs were often shoddy.
It also raised concerns about difficulties for motorists trying to identify the best value products.
Repairs and replacementsThe Commission has been studying the £11bn private motor insurance market for more than a year, following a referral from the Office of Fair Trading (OFT).
It agreed with the OFT that the system was not working well for motorists.
It found that premiums were pushed up because the insurer of a driver who was not at fault in an accident arranges for a replacement car or repair, but the at-fault driver's insurer foots the bill.
"This separation of control and liability creates a chain of interactions which result in higher costs for replacement cars and for repairs being passed on to at-fault insurers," it said.
"The Commission estimates the extra premium costs to be between £150m and £200m a year.
"There is insufficient incentive for insurers to keep costs down even though they are themselves on the receiving end of the problem."
The Commission will now consider ways to fix the market, with a final report published by September 2014.
The options include a cap on the cost of replacement vehicles, or making an insurer of the not-at-fault driver responsible for providing the replacement vehicle.
Alternatively, the insurer of the at-fault driver could manage the claim.
WorriesOther concerns raised by the Commission, affecting drivers of 25 million privately registered vehicles in the UK, include:
- "Too many" substandard repairs following an accident
- Limited information about add-on insurance products, making it difficult to identify the best-value offers on the market
- Price-parity contracts between price comparison websites and insurers, which mean that the policy is not offered more cheaply elsewhere.
The Commission will consider the idea of compulsory audits of repairs and the requirement of clearer information on price comparison websites.
"[These] possible remedies are a further step along the road to getting a market that enables insurers to deliver fully for consumers," said James Dalton, of the Association of British Insurers (ABI).
"We look forward to continuing to engage with the Competition Commission as it carries forward its work and we hope that this will lead to further improvements in the market and lower premiums for customers."
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