John Fingleton, OFT chief executive, said that consumers are being placed at a disadvantage by the lack of competition in the industry.
The decision follows complaints from consumer groups that expensive and poor-value PPI products are being mis-sold, thereby increasing the risk of personal debt.
“Despite some evidence of a degree of consumer satisfaction with aspects of the product, the evidence as a whole suggests consumers get a poor deal,” said Mr Fingleton.
“This referral will enable the Competition Commission to undertake a thorough investigation of the market and, if necessary, ensure that appropriate remedies are put in place.”
Citizens Advice has welcomed the move but said that “swifter action” is needed to protect consumers from “PPI rip-offs”.