The price of motor insurance is to be officially investigated by the Office of Fair Trading after it found premiums rose by 9% in the first three quarters of 2011.

The announcement follows a call for evidence made by the watchdog in September, when it said it wanted to establish if there were any competition or consumer issues contributing to a continued rise in insurance costs. Prior to price increases this year it said private motor insurance premiums paid in the UK rose by about 12% between 2009 and 2010.

Its investigation will now focus specifically on the provision of third-party vehicle repairs and the cost of replacement vehicles hired to drivers involved in accidents that are not their fault.

“Our concerns relate to the provision of third-party vehicle repairs and credit hire replacement vehicles to claimants, where we suspect companies may be competing to extract money from each other rather than keeping premiums as low as possible and providing car owners with value for money,” said Sonya Branch, OFT senior director of services, infrastructure and public markets. “By carrying out a market study we aim to clarify whether a market investigation reference to the Competition Commission is appropriate.”

According to figures from the British Insurance Brokers’ Association (Biba) the typical cost of a replacement vehicle arranged through a credit hire company is £1,300, and there are normally 800,000 credit hire claims per year, equating to a £1bn a year cost. In contrast, if an insurer organises a rental directly this typically costs between £400 and £600.

“The OFT’s announcement that it will look into this area is sensible,” said Graeme Trudgill, technical services manager at Biba. “There has to be a balance between making sure motorists are still mobile while their car is repaired, and cutting out the fraud and exaggeration that inflates costs.”

The call for evidence also found that a key factor in the rise in premiums was the costs associated with personal injury claims – but this won’t form part of the OFT investigation because the government is already developing proposals to end the no win, no fee culture prevalent in the sector. It is planning to ban referral fees in personal injury claim cases in proposals currently before parliament.

The OFT also said it had concerns about the provision of motor legal protection cover to car owners. This is often sold as an add on to motor insurance at the point of sale. The watchdog said it is concerned about the complexity of the product, and that the way it is being sold may make it difficult for car owners to assess whether or not they are getting value for money. It has asked the Financial Services Authority to take an urgent look at this.

It concluded that overall motorists are shopping around effectively for car insurance, with 73% of people in Great Britain and 54% in Northern Ireland checking prices from a number of insurers at their last renewal.

The OFT expects to complete its market study by Spring 2012.