Earlier this month, the Financial Conduct Authority (FCA) commenced a market study in a bid to understand whether consumers who use credit to pay for motor and home insurance are accessing fair and competitive deals. Introduced in response to growing concerns about rising premiums, it coincides with the launch of the government’s motor insurance taskforce.
Research from the consultancy firm Pearson Ham revealed that the average cost of paying motor insurance premiums in monthly instalments was 10.7% in September 2024. This was down from 11.9% in October 2023. Meanwhile, home insurance premium finance costs were lower, with a market average of 8.3% in September 2024, down from 10.0% in October 2023.
The research noted the wide variability in premium finance charges, citing motor insurance where premium finance charges range from 1.9% to 20.2%, and home insurance where some products offer no additional charge for monthly payments while others impose charges as high as 36.8%.
Pearson Ham highlighted that providers of premium finance also charge a deposit or initial payment amount, in addition to monthly interest. In September of this year, all motor insurers required a deposit or initial payment with the average amount required upfront down from 13.6% in October 2023 to 12.7%. The highest deposit/initial payment for motor insurance in September 2024 was 33%, while the lowest was 8.3%.
In home insurance, the average deposit required decreased from 11.7% in October 2023 to 10.8% in September 2024. Most insurers benchmarked at 9.9%. Where a deposit was charged, the highest required payment for home insurance in September 2024 was 25%, and the lowest was 7.9%.
Stephen Kennedy, director at Pearson Ham Group, noted how the research showcases how the market has moderated pricing in the past year. “The study indicates that while costs to consumers are beginning to ease, the level of variability may still be considered a challenge, potentially leaving some consumers exposed to disproportionately high charges.”
Reaction to the announcement varied across the market with Pearson Ham highlighting that the study was launched in recognition that premium finance is an important product for many customers, however, there is concern that it may not represent fair value for some customers and that competition may not be functioning effectively. Kennedys noted that the firm welcomed the FCA's “efforts to ensure transparency and urges insurers to continue refining their offerings to ensure consistency and fair value for consumers.”
Meanwhile, James Daley, MD of the consumer group Fairer Finance, said it is “encouraging” that the regulator is also looking at premium finance but that this should include a consideration of whether we need this sector at all. It only exists because most insurers insist that consumers pay for their annual insurance upfront - forcing them to borrow at punitive interest rates if they can't manage it.”
Eamon McGinnity, UK Insurance Partner at EY, highlighted that the study is the third major regulatory intervention by the FCA since August, which outlines the watchdog’s clear intention to subject the insurance industry to a period of heightened regulatory scrutiny.
“The spotlight will remain firmly on product pricing and distribution, fair value and vulnerability,” he said. “With the regulator and Government focused on driving real change in the market, it is vital that insurers respond to concerns by proactively sharing their vision for the delivery of fair value to all. If they don’t, it is now very clear that the regulator and Government will shape the future for them.”
Offering further perspective of where the FCA’s study fits in with the announcement of the government’s motor insurance taskforce, Broadstone’s Kathryn Moore, highlighted that the aim of the government’s motor insurance tasks is to identify the factors underlying the increasing costs and to agree and put into place solutions to stabilise premium levels and ensure a fairer deal for policyholders.
Moore, who is head of personal lines in Broadstone’s Insurance, Regulatory & Risk division, noted that there is a focus on those who have been hardest hit by the increasing costs, which includes those on lower incomes, the elderly and young drivers. “The FCA, who are part of the taskforce, has stated that they will analyse the cause of increasing costs and the impact of those increases on different customer groups including policyholders from lower incomes,” she said. “It therefore makes sense that a market study takes place into whether the cost of premium finance is offering fair value.”
Identifying some of the top concerns being raised by the FCA with regard to premium financing, she said the major concern is that premium finance disproportionately affects those in society who may not be able to afford a one-off premium for this compulsory insurance and that have reliance on a vehicle. “There is the potential that these customers could be even worse off if the premium finance does not represent fair value.”
From her perspective, Moore, said, it is really important that the FCA, the government, and all relevant stakeholders take a holistic approach to identifying the changes needed to create a fair and competitive motor insurance premium landscape.
“The FCA can investigate, sanction and propose rules but they can't remedy multiple factors that may be out of control of the insurer that influence the cost of motor premiums,” she said. “In February, the ABI unveiled a 10-step plan to tackle the increasing cost of motor insurance.
“In order for this to be successful, the majority of these require action and ownership from the regulator, government and the wider industry. The cost of repairs, the damage done by pot holes, the prevalence of fraudulent claims are all factors that impact car insurance premiums, as is the cost to everyone of covering the costs associated with uninsured drivers.”
Responding to the announcement by the FCA, a spokesperson for Premium Credit noted that the FCA’s publication of the proposed Terms of Reference for a market study into the provision of premium finance for motor and home insurance has been hinted at for some time.
“Described as an ‘essential’ product by Matt Brewis, director of general insurance at the FCA earlier this year, premium finance is an important payment option helping customers to spread the cost of their insurance premium in to monthly repayments,” the spokesperson said. “Premium Credit welcomes the review, which we believe will enhance transparency across the insurance market and ensure consistency and fair value in the way premium finance is offered.”
