The competition watchdog is proposing to impose a cap on replacement vehicle costs following motor accidents as part of a clampdown to help cut premiums for all drivers in the £11 billion private motor insurance market.
The Competition and Markets Authority (CMA) said the cap on charges passed to the insurer of the driver who is at-fault in an accident for the cost of providing a replacement vehicle to the non-fault driver, would "more closely reflect the costs incurred and remove significant inefficiencies".
The watchdog has previously found that the "complex chain" of claim costs following an accident collectively inflates premiums by as much as £200 million a year.
The CMA is also proposing that competition in the market should be boosted by banning price parity agreements between comparison websites and insurers. These agreements stop insurers from making their products available to consumers elsewhere more cheaply.
It said consumers should be given better information about their rights following a motor accident and about the costs and benefits of taking out protection against their no claims bonus.
The CMA also recommends that City regulator the Financial Conduct Authority (FCA) looks at how insurers inform consumers about other add-on products related to private motor insurance. The watchdog previously found it can be hard for people to work out the best-value add-on products in the market.
The CMA, which superseded the Competition Commission earlier this year, will consult on the plans before publishing a final decision in September.
Alasdair Smith, chairman of the private motor insurance investigation group and CMA deputy panel chairman, said: " There are over 25 million privately registered cars in the UK and we think these changes will benefit motorists who are currently paying higher premiums as a result of the problems we've found.
"A cap on replacement vehicle costs will reduce the amounts charged to insurers of at-fault drivers, which will cut out some of the inefficiencies in the system and feed through to reduced premiums for all drivers."
He said that comparison websites are "great" in helping motorists look for the best deal, which in turn has helped to increase competition.
But Mr Smith continued: "We want to see an end to clauses which restrict an insurer's ability to price its products differently, whether on different price comparison sites or on other channels."
The CMA found that the collective costs to consumers in relation to the provision of replacement vehicles to non-fault motorists are between £70 million and £180 million a year.
It has not suggested a definite level for where the cap should be set in relation to replacement vehicle costs and this is something that will be looked at in more detail in due course.
In many cases following an accident, the insurer of the non-fault driver arranges for a replacement car and repair, while the insurer of the at-fault driver foots the bill.
It is this separation of control and liability which ramps up the bill, the watchdog found in a previous update to its investigation. It said there is "insufficient incentive" for insurers to keep the costs down.
In December, the watchdog said it had found a "significant difference" between the costs incurred by at-fault drivers in providing a replacement vehicle and the cost charged to the at-fault driver when this was done by others.
Although the inflated cost is initially felt by the insurer of the driver who is at-fault, it eventually feeds into everyone's premiums.
The watchdog said it would like the FCA, as part of ongoing work to look at add-ons across all insurance products, to consider how drivers could be better-informed when considering which product to choose.
It has uncovered "particular problems" related to no claims bonus protection, where both the price of the product and how useful it is "are often unclear to customers, and we believe insurers should provide much better information about it".
The watchdog said that while it is concerned about the arrangements of many insurers for monitoring the quality of car repairs, with an apparent over-reliance on consumers to spot post-repair problems, there is "insufficient evidence" for it to intervene on the basis that this poses a problem with competition in the market.
The proposals received broad backing from insurers, who pointed out that car insurance premiums have already been tumbling.
James Dalton, head of motor insurance at the Association of British Insurers (ABI), said the proposals could help to cut out some unnecessary costs faced by insurers and help to lower motorists' premiums.
He said: "They build on reforms being introduced to tackle fraudulent whiplash claims, which have partly led to the average comprehensive motor premium falling by 14% since the start of 2012.
"We urged the CMA to focus on the credit hire market, so we are pleased that they have proposed a cap on the prices that credit hire operators can charge to the insurer paying the bill for replacement vehicles. This will help reduce the often inflated bills from credit hire operators and should help lower premiums."
The AA, which represents 15 million motorists in the UK, welcomed the proposals and also pointed out that car insurance premiums have already been falling "dramatically" amid Government reviews of car insurance which have helped to weed out bogus personal injury claims.
The first quarter of 2014 saw a record fall in car premiums, according to the AA British Insurance Premium Index. It showed that the average quoted premium for someone who shops around fell by 5.6% over the quarter and 16.6% over 12 months, wiping £105 off the typical cost of a comprehensive policy which is now £531.
Simon Douglas, director of AA Insurance, said: "This shows that the industry is already responding to changes to the way that car insurance is sold and how claims are handled. The CMA's recommendations could, it's estimated, wipe perhaps a further £20 or so off the average premium.
"While we warmly welcome any measures that help to contain consumer costs, there remains considerable scope to reduce costs to a much greater extent by continuing to address the high burden still borne by car insurance customers of fraudulent whiplash claims, which was outside the remit of this inquiry."