Consumer group Which? is calling for a ban on extra charges for motor insurance customers who pay monthly, arguing that some are being charged rates higher than they might pay on a credit card.
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 this option to pay for motor insurance.
Mystery shopping investigation
The group conducted a mystery shopping exercise, collecting premium finance quotes in August from 30 motor insurance providers. The same customer profile was used throughout: 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 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? 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 said 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.”
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.
“It is important that anyone involved in arranging premium finance can demonstrate that they are offering fair value and that they are transparent about the cost of the finance to their customer.
“The FCA’s (Financial Conduct Authority’s) recent report on premium finance highlighted that typically in the broker market, APRs inclusive of any broker commission is generally comparable to other forms of credit a customer could obtain to pay for their insurance cover.
“We continue to help our members to show that their overall package to consumers offers fair value through our fair value assessment framework and we also have a member guide to refer to when arranging premium finance.”
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.
“We know that people value the option to pay monthly to keep their insurance affordable and accessible.
“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.”
