The Competition Commission is launching an investigation to find out whether insurance companies are ripping off their customers.
The announcement comes as figures show that premiums are rising at an incredible rate of £225 million a year.
The Office of Fair Trading (OFT) today referred the insurance industry - worth an estimated £9.4 billion in the UK - to the Commission after discovering that at-fault drivers had little control over the way in which repairs were carried out or the way in which replacement vehicles were supplied to not-at-fault drivers.
It said that practices within the insurance industry were ramping up premiums, potentially by around £10 per policy, adding that there was no ''quick fix" to the problems identified and that further investigation was needed.
The commission now has up to two years to report its findings.
Clive Maxwell, chief executive of the OFT, said: "Competition appears not to be working effectively in the private motor insurance market.
"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 Association of British Insurers (ABI) welcomed the news. Nick Starling, ABI's director of general insurance, said: "The OFT found what insurers have known for years – that when a customer has a crash that is their fault, the insurer has little control over the cost of the subsequent claim.
"Regulation of all players in the market to tackle excessive costs is needed, and we look forward to working with the Competition Commission to bring much needed reforms to the market that will, in turn, result in lower car insurance premiums for consumers".
Andrew Moody, managing director of Retail Motor Law, added: "I applaud the OFT for making this bold move – it is good news for small businesses and consumers. The Competition Commission has strong and wide ranging powers, so it will be very interesting to see what happens next."