Regulators are investigating the UK car insurance market amid concerns it is “not working well for motorists”.

The Office of Fair Trading (OFT) has referred the market to the Competition Commission after it found insurers of at-fault drivers have little influence over the way repairs and replacement vehicles are provided to those not at fault in accidents.

The OFT also fears insurers of not-at-fault drivers – and others such as insurance brokers, credit hire organisations and repairers – may be raising costs for repairs and replacement vehicles.

“Competition appears not to be working effectively in the private motor insurance market,” OFT CEO Clive Maxwell said.

“The insurers of at-fault drivers appear to have little control over the bills they must pay and this may be leading to higher costs for them and, ultimately, higher premiums for motorists.”

The Competition Commission will investigate whether market practices prevent or restrict competition. It has up to two years to report and can ask the Government to introduce new legislation.

The Association of British Insurers has welcomed the move, saying insurers “have faced inflated rates for credit hire cars and excessive hire periods, which have led to higher insurance premiums for customers”.

However, the investigation does not bode well for UK direct motor and home insurer Direct Line, which recently announced details of its initial public offering on the London Stock Exchange.

The float is part of a deal between Direct Line’s parent – the Royal Bank of Scotland Group – and European financial regulators. The bank must sell its controlling stake by the end of next year and entire stake by the end of 2014 as part of its 2008 bailout by the UK Government.

Some UK analysts say the Commerce Commission inquiry will not help Direct Line’s share price, nor will it reassure wary investors in a motor and home insurance market that is already intensely competitive.