Consumer group Which? is calling for a ban on charging extra for monthly motor insurance payments, arguing that some customers could end up paying rates higher than they might on a credit card if they cannot afford an annual policy upfront.
Premium finance allows customers to pay for their policy in monthly instalments rather than annually. Which? estimates that 15 million customers across the UK use premium finance to pay for motor insurance.
Mystery shopping investigation
The consumer group conducted a mystery shopping investigation, collecting premium finance quotes in August from 30 motor insurance providers to assess the deals on offer. The same customer profile was used, including a 42-year-old motorist based in Sheffield, driving for 10 years with no claims or incidents in the past five years.
The median average APR (annual percentage rate) across 36 quotes analysed in the investigation was 26.2%, although some rates quoted were as high as 50% plus. Which? said this compared with around 25.9% for a credit card APR, according to its analysis of Moneyfacts data.
Some firms in the Which? insurance research charged 0% APR, and some did not provide APR quotes.
Industry responses
Which? said firms had told it that premium finance is associated with higher levels of credit risk, and that assessing APR in isolation does not give a complete assessment of the value provided to customers. Firms also told Which? that premium finance arrangements were kept under review, to allow APRs potentially to be reduced.
But Which? argued that motor insurers should be banned from charging extra for monthly payments, as well as being required to offer a pay monthly option.
Rocio Concha, director of policy and advocacy at Which?, said: “Too many consumers have already been pushed out of driving or into financial peril.” She said that a “ban on two-tier pricing for motor insurance” would “create a fairer, more competitive system that doesn’t punish the customers least able to pay”.
James Daley, managing director of Fairer Finance, said: “It can’t be right that the poorest people in our society are forced to pay the most for their car insurance.”
Industry perspectives
Graeme Trudgill, chief executive of the British Insurance Brokers’ Association (Biba), said: “Premium finance serves a valuable purpose, helping consumers to spread the cost of their insurance cover.” He added that it is important for anyone arranging premium finance to demonstrate fair value and transparency about the cost of the finance.
Trudgill noted that the FCA’s recent report on premium finance highlighted that in the broker market, APRs inclusive of any broker commission are generally comparable to other forms of credit a customer could obtain. He said Biba continues to help members show that their overall package offers fair value through its fair value assessment framework.
A spokesperson for the Association of British Insurers (ABI) said: “Many households are under financial pressure, making the protection that insurance provides against unexpected shocks more important than ever.” The spokesperson added: “Providing pay monthly options involves some costs for insurers, including keeping cover in place for a period if payments are delayed or missed. When an APR is charged, our members are committed to ensuring it’s fair, transparent, affordable and proportionate for their customers.”
