Consumers are being shortchanged by car insurance providers, the Financial Conduct Authority (FCA) has said.
The authority claims it has evidence some firms are undervaluing customers’ cars when vehicles are written off.
In some cases staff only increase offers when a consumer complains, it said.
Offering a price lower than fair market value is not allowed under FCA rules and the watchdog said it would take action against companies it found doing this.
Sheldon Mills, the executive director of consumers and competition at the FCA, said: “Insurance firms should offer settlements at the fair market value.
“This is especially important now as people struggling with the cost of living will be hit in the pocket at precisely the time they can ill afford it.
“We are watching the behaviour of firms closely and will act quickly to stop firms and prevent harm to consumers where we see it.”
A spokesperson for the Association of British Insurers said: “Our members have processes in place to determine a fair market value for a written off car but we agree it’s important that policyholders trust the offer they receive.
“We’ll discuss this with our members to understand how processes are kept under review, including the information provided to customers to understand the different settlement options available to them, particularly given fluctuations in secondhand car prices.”