Insurers compete in a “dysfunctional” manner, said the Office of Fair Trading, as it referred the sector to the Competition Commission.
The OFT said insurers of no-fault drivers involved in accidents are earning fees from referrals to car hire firms that provide vehicles at high rates and for longer than necessary, raising the bill paid by at-fault drivers’ insurers.
“The focus that insurers have on gaining the competitive edge through raising their rivals’ costs means that drivers pay more than they need to for their motor insurance policies,” said chief executive John Fingleton as he made the provisional referral.
Nick Starling, director of general insurance at the ABI, said: “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.”
Analysts said an inquiry would make a ban on insurers earning referral fees more likely, potentially denting profit at Admiral, which is more dependent on such sources of income than rivals.
Eammon Flanagan at Shore Capital said the probe would create uncertainty which would hang over Admiral’s stock “for months to come”.
Shares in Admiral fell on Wednesday after Kevin Ryan at Investec warned the firm is worth only around half its current market value.