The Office of Fair Trading in the UK has provisionally decided to refer the private motor insurance market to the Competition Commission after it found evidence that insurers compete in a dysfunctional way that may push up premiums for drivers by 225 million pounds a year.

In its market study the OFT found evidence that insurers of at-fault drivers have little control over the way in which these repairs and vehicle replacement services are carried out or the associated costs. Instead, 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. On this basis the OFT concluded that there were reasonable grounds to suspect that there are features of the private motor insurance market that prevent, restrict or distort competition.

The regulatory body went on to suggest 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.

John Fingleton, Chief Executive of the OFT, said: '"Competition in this market does not appear to work well for drivers. We believe the focus that insurers have on gaining the competitive edge through raising their rivals' costs means that drivers pay more than they need to for their motor insurance policies." He added, "Because insurers are distracted from competing primarily on the quality and value of service provided to insured drivers, incentives for greater efficiency may be reduced."