Consumer group Which? is calling on the government to introduce new rules banning motor insurance firms from charging higher rates to customers who opt to pay monthly. The group said some customers choosing premium finance could find themselves paying rates higher than they might pay on a credit card if they cannot pay for an annual policy up front.
Investigation finds high APRs on premium finance
According to Which?, an estimated 15 million customers across the UK use premium finance to pay for their motor insurance in monthly instalments rather than annually. The consumer group carried out 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, and included the customer being 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 mystery shopping investigation was 26.2 per cent, although some rates quoted were as high as 50 per cent plus. Which? said this compared with around 25.9 per cent for a credit card APR, according to its analysis of Moneyfacts data. Some firms in the Which? insurance research charged 0 per cent APR and some did not provide APR quotes.
Calls for a ban on two-tier pricing
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.”
FCA findings and industry response
Which?'s investigation comes after the Financial Conduct Authority (FCA) published its findings from a study into whether customers were getting fair value out of premium finance in February this year. The report found that average APR had fallen in recent years and insurance firms that had been challenged by the FCA for unfair rates reduced APR by an average of 7 per cent. Firms incur a cost to provide premium finance options, even under a 0 per cent APR model, the report said, and introducing a cap on APR or a mandatory rate of 0 per cent could increase the cost of premiums and reduce access to insurance.
Responding to the calls from Which?, the FCA said: "Premium finance plays an important role in helping people spread the cost of insurance, but it’s important that they get fair value. Since our intervention, customers have saved an estimated £157m a year, and we have been clear that our work in this sector is continuing. We have acted where firms are charging higher rates of interest and will take further action against those that cannot demonstrate they are delivering fair value to consumers."
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 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.”
