The high cost of insuring a car in the UK is to be investigated by the Office of Fair Trading after it has discovered that, in the past two years, the price has increased by 21 per cent. The watchdog will be paying close attention to the suspected restriction on competition being deliberately forced by companies providing replacement car rentals, and garages undertaking repairs on damaged car hire vehicles.

The OFT said it believed that it was currently difficult for insurance companies to establish whether or not the prices they are paying for courtesy cars or repairs are reasonable or not. A major contributor to the rising price of premiums appears to be the referral fee. This is the money paid out to an insurer by a garage, or replacement car company, every time they are given a new customer.

The government is currently looking at ways of making the practice illegal, and Justice Minister Jonathan Djanogly recently condemned the practice calling it a racket. According to Andy Hughes, and analyst with BNP Paribas, every time an accident victim’s details are handed over to a third party, insurers can expect to receive around £300.

OFT spokeswoman, Sonya Branch, said the body believed that companies supplying replacement cars, or undertaking repairs, were concentrating on making money off one another, rather than attempting to keep premiums to a minimum for the consumer.

The regulator will also examine the complex ways in which insurers word their legal protection products, and whether internet price comparison sites are negatively affecting competition.