The Office of Fair Trading (OFT) has announced a provisional decision to refer the private motor insurance market to the Competition Commission.

A study launched last December found ‘evidence that insurers compete in a dysfunctional way that may push up premiums for drivers by £225m a year’.

The accusation is that costs are inflated by the insurer of the ‘not-at-fault’ driver, with referral fees and whiplash claims in the spotlight.

However, Nick Starling, of the Association of British Insurers (ABI), welcomed the news. "For too long insurers and people paying premiums have faced inflated rates for credit hire cars and excessive hire periods, which have led to higher premiums," he said.

Andrew Moody, managing director of Retail Motor Law (RML), added: “I applaud the OFT for choosing to refer this matter to the Competition Commission. It is the right decision given the shocking evidence.”

The full market study is available on the OFT website and a final decision is expected in October.