Cheap car insurance.

For long-suffering motorists who have endured a decade of above-inflation rises in premiums, that phrase probably sounds like an oxymoron. While motorists drive cars, their insurers appear to have been riding a gravy train. That is the conclusion of the Office of Fair Trading, which yesterday finally referred the £9.4 billion a year car insurance market to the Competition Commission. An OFT investigation concluded that there are "reasonable grounds for suspecting that there are features of the market that prevent, restrict or distort competition".

Car insurance used to be simple. Quotations were based on the driver's record and actuarial risk, and insurers made much of their profit from the interest on premiums. A long period of record low interest rates has reduced this handy source of revenue. As a result they have had to cast around for new sources of profit and today some companies derive nearly two-thirds of their profits from what are known euphemistically as "ancillary sources".

The way the UK industry operates appears to leave the "at fault" driver wide open to exploitation by the "not at fault" driver's insurance company. There is little to stop the latter inflating bills for car hire and repair costs and taking a generous cut for themselves. Claims are often reduced to squabbles between the two parties' insurers, with one side pushing up the bill and the other attempting to mitigate it.

An OFT report earlier this year estimated that the average claim is inflated by more than £700, with the inevitable knock-on effect on premiums.

This issue is more complex than it first appears. Clearly a better balance between the two sides is required, while ensuring that the innocent party's rights are protected when it comes to the standard of repairs and remaining mobile while the vehicle is off the road.

In addition, this inquiry will be incomplete if it fails to investigate the menace of bogus personal injury claims, particularly for whiplash. An investigation last year revealed some companies were selling details of their own policyholders' accidents to solicitors, who then encouraged drivers to sue for damages. A rigorous system for independently evaluating whiplash and other injury claims is urgently needed.

Unsurprisingly, shares in motor insurance companies fell yesterday, casting a long shadow over the flotation of Direct Line, which is currently part of largely state-owned RBS and potentially knocking hundreds of millions off the company's value. That is no reason for failing to tackle an issue that has cost hard-pressed motorists dearly over many years. It is a shame that the Competition Commission may take another two years to impose greater transparency on this murky industry. Car insurance should operate on the basis of fair competition, grounded in quality of cover and value for money, not an underhand operation by insurance companies, designed to increase the costs of their rivals.