Motor insurers are facing a crackdown on the "complex chain" of claims costs which inflate premiums by as much as £200 million a year.
The Competition Commission said it is considering a cap on bills for replacement vehicles and repairs after finding that motorists are bearing the brunt of unnecessary costs following an accident.
The costs are initially faced by the insurers of at-fault drivers, but they feed through into extra premium costs for all motorists.
In a wide-ranging investigation, the watchdog highlighted concerns about the way insurers sell add-on products to consumers.
It is also concerned that contracts between price comparison websites and insurers often require the same price to be offered for an insurer's product across the market, thereby reducing competition.
Overall, the commission's year-long look into the £11 billion private motor insurance market found that it is not working well for motorists.
Alasdair Smith, who is leading the watchdog's investigation, said: "We are now considering a range of possible measures, some of them far-reaching reforms, to ensure that the market better serves the interests of customers."
Mr Smith said that in most cases the party managing the accident claim - typically the non-fault insurer or intermediary - was not the party liable to pay the costs of the claim.
He added: "There is insufficient incentive for insurers to keep costs down even though they are themselves on the receiving end of the problem."
The commission estimates the extra premium costs due to the separation of control and liability on replacement cars and repairs to be between £150 million and £200 million a year.
It is considering whether to make a driver's own insurer responsible for providing a replacement vehicle or to give at-fault insurers greater opportunity to take control over managing claims.
There may also be caps on the cost of providing a replacement vehicle and on repair costs, as well as compulsory audits of repair quality after the watchdog found that following an accident too many repairs were not completed to the required standard.
Other provisional findings identify problems with the sale of add-on products as it is hard for consumers to find the best-value products.
It said motorists have limited information about add-on insurance products while insurers have point-of-sale advantage.
The Association of British Insurers (ABI) said today's report was "a further step along the road to getting a market that enables insurers to deliver fully for consumers".
James Dalton, ABI's head of motor, said: "As an industry we remain absolutely committed to improving the car insurance market for hard-pressed motorists.
"We asked for the commission's inquiry into the market to help insurers continue the work we are already undertaking to remove costs that unnecessarily drive up car insurance premiums.
"We look forward to continuing to engage with the Competition Commission as it carries forward its work and we hope that this will lead to further improvements in the market and lower premiums for customers."