Britain's financial watchdog on Friday warned insurers against undervaluing cars and other items when customers submit a damage claim and said it was taking unspecified action against firms breaking its rules.
The Financial Conduct Authority said it has evidence that some consumers who had their cars written off after an accident are being offered sums lower than the vehicle's fair market value.
Offering a price lower than fair market value is not allowed under the FCA rules.
Increasing business expenses add pressure on insurers to control claims costs and offer cash to settle instead of paying for vehicle repairs - a move that may not be in the best interest of customers, the FCA said.
"Insurance firms should offer settlements at the fair market value," said Sheldon Mills, FCA executive director for consumers and competition.
"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."
Separately, insurance firms are also grappling with a rise in auto insurance application frauds.
Earlier this week, insurer Aviva said it had seen a 16% rise in such malpractices till October this year compared with the same period last year.
Applicants were falsifying information such as their age, how long they have held a licence, how many penalty points they have on their licence and occupation, Aviva said.
It warned motorists to think twice about lying to their insurer in an attempt to save a few pounds on cover during the cost-of-living crisis. (Reporting by Huw Jones; Editing by Arun Koyyur)