Insurers have promised to clean up their act after coming under fire over the “poverty premium”, whereby customers who cannot afford to pay for car insurance in one go are charged punitive interest to spread the cost.
The Association of British Insurers (ABI) said its members had agreed to an action plan aimed at managing the cost of paying monthly for motor insurance. The pledges include companies giving customers clear cost comparisons between the two payment options and publishing the average finance charge.
One of the tenets of what the ABI calls its premium finance principles is that when setting prices, insurers heed that “many consumers cannot afford to pay for their insurance upfront, in one lump sum, and so charges for paying by monthly instalments can fall hardest on those who can least afford it”.
Insurers should also ensure charges are “reasonable”, relative to the costs of providing premium finance for monthly payments, the code says. And they should consider how the charges stack up against other payment options, such as using a credit card.
Insurers give customers the choice of paying one annual premium or in monthly instalments. However, while the monthly payments are lower, the overall cost is typically higher because the premiums are treated as a loan, with an interest rate added to the payment. The interest rates available span 20.50% and 36.33%, according to research by the consumer rights group Which?.
Premium finance has become increasingly contentious as the price of car insurance and household bills continue to soar during the cost of living crisis. Car insurance has risen by 43% over the past 12 months, according to Confused.com. It puts the average cost of a comprehensive car insurance policy at £941, an increase of £284 over the past year.
The ABI defended the industry, saying that in 2023 claims inflation pushed up the cost of premiums by 25%. It pointed to analyst estimates that for every £1 paid in premiums that year, insurers incurred £1.14 in claims and expenses.
Premium finance has also been on the radar of the Financial Conduct Authority (FCA), which has twice written to insurance company bosses reminding them of their duty to offer customers fairly priced products.
The ABI, which said it would publish a report on the plan’s impact, said while a voluntary industry-led cap on premium finance charges was considered and discussed with the FCA, the principles “represent what is possible within the limits allowed by competition laws and provide a basis for firms to take meaningful action”.
after newsletter promotion
Rocio Concha, the director of policy and advocacy at Which?, said: “Car insurance is a legal requirement for motorists, yet many people who can’t afford to pay for their annual premiums in one go are being hit with eye-watering levels of interest on monthly payments of up to nearly 40%, which can add on hundreds of pounds a year.
“While it’s good to see the insurance industry finally recognising that this is a huge problem, waiting another year for the ABI to publish its findings when insurers should already be doing this is not good enough.
“The FCA needs to make clear where insurance companies’ pricing practices are failing to meet fair value requirements, and set deadlines for firms falling short to fix this.”