Britain’s Office of Fair Trading (OFT) has provisionally decided to refer the country’s private motor insurance market to the Competition Commission after finding that referral fees and rebates boost insurance costs.

The OFT says it has reasonable grounds to suspect there are features of the market that prevent, restrict or distort competition. It says insurers compete in a dysfunctional way that may push up premiums by £225 million ($357.9 million) a year.

After an accident, the at-fault driver’s insurer is responsible for meeting the cost of repairs and replacement vehicles for the driver who is not at fault, but has little control over how the repairs and vehicle replacements are carried out, or the costs.

The OFT says insurers of not-at-fault drivers, brokers and repairers take advantage of this to generate revenue through rebates and referral fees, inflating the cost.

CEO John Fingleton says insurers can gain a competitive edge by raising their rivals’ costs, which adds to the overall insurance cost.

“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,” he said.

The OFT will decide by October whether to make the referral to the Competition Commission, which can investigate in greater depth.

The Association of British Insurers welcomed the investigation, with Director of General Insurance Nick Starling saying all players in the market need regulation to tackle excessive costs.

“For too long insurers have faced inflated rates for credit hire cars and excessive hire periods which have led to higher insurance premiums for customers.”