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Get a quoteIndustry promises to change pay-monthly car insurance – but is it enough?
The Association of British Insurers announces new premium finance principles
Paying in instalments can add hundreds of pounds to your car insurance bill – but with upfront annual costs of around £1,000 reasonably common, many drivers don't have much choice but to pay monthly.
The Association of British Insurers (ABI) has announced a set of five new principles aimed at managing the cost of insurance for drivers who pay monthly (using what's known as premium finance).
Here, we'll explain what the ABI proposes, whether we think it's likely to fix the problem and how to bring down your car insurance costs even if you can't afford to pay annually.
The ABI's premium finance principles
Members of the ABI – the main trade body for the insurance industry – have today committed to the following steps to tackle premium finance costs:
- 1. Transparency When setting out any cost for paying by monthly instalments, insurers should provide a clear comparison of the total cost of paying annually and the total cost of paying monthly. Insurers should also publish up-to-date, clear information about their common or average premium finance charges.
- 2. Affordability When deciding on their premium finance offering to customers, insurers should have regard to the fact 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.
- 3. Fair value Insurers must ensure that costs associated with monthly instalments represent fair value. As part of this, insurers should consider how any income from premium finance compares to their income on the core premium.
- 4. Proportionality Insurers should ensure that charges are reasonable, relative to the costs of providing premium finance for monthly payments. Insurers should also consider charges relative to comparable and accessible alternative payment options, such as a credit card (see more on this below).
- 5. Governance and accountability Insurers must regularly review the cost to customers of premium finance, using suitable information or data to ensure any charges remain appropriate. They should ensure the right level of senior management accountability for their approach taken on premium finance charges and its impact on consumers.
The ABI intends to publish a report by summer 2025 on the impact of its principles on premium finance for car insurance customers.
Will the ABI's steps be enough?
Sales data examined by Which? earlier this year revealed that as of last September, drivers paying monthly were forking out over £300 more, on average, than drivers who paid in one go.
Recent rises in underlying car insurance premiums have exacerbated the cash cost of paying in instalments, while also making paying upfront less affordable for more drivers.
This makes the ABI's commitment to tackling the problem encouraging, but it's far from clear how effective its proposed measures will actually be.
Its five steps are all arguably requirements under existing regulations, so they're things insurers should already be doing and focusing on.
- Find out more: New Consumer Duty launches: what will it mean for you?
Why insurance isn't like a credit card
The ABI's proposal (in its 'proportionality' principle) that insurers consider credit card rates when evaluating the fairness of their monthly payment options also raises questions.
When we recently investigated the interest car insurers charge, we found that the higher rates charged by insurers tended to resemble interest applicable to credit card borrowing. In January this year, the average credit card rate was 34.5% APR – with most charging up to 25%.
Meanwhile, among 39 car insurers we surveyed, we found the average APR charged was 23%, with some charging between 30% and 40% APR.
However, credit card lenders and insurance firms arguably face very different kinds of risk when offering credit. For example, if you're £1,000 in debt to a credit card lender and fail to repay, there's a chance the lender will never see this money again. However, if you've taken out car insurance with an upfront price of £1,000, and default on monthly payments, the insurer can cancel the policy by giving (in most cases) a week's notice.
They do face some financial losses in this scenario, especially if you've claimed. But ultimately, if you can't maintain payments, you won't receive the benefit of a full year's cover.
Consequently, we think monthly customers paying rates similar to those offered by credit card lenders are probably being disproportionately charged considering the modest risk the insurer takes on.
'A tax on being poor'
In a Treasury Select Committee session, where Which? appeared and gave evidence and some of our findings were quoted, an ABI representative noted that 'it's hard to sit here and say 40% feels reasonable.'
Matt Brewis, the head of insurance at the Financial Conduct Authority (FCA), who recently described premium finance as 'a tax on being poor' in an interview with The Insurance Post, also gave evidence at the session. He said '[premium finance] is a product that I care a lot about, and I am very concerned about the additional cost it can have on consumers. It is an essential product for those consumers who cannot afford to pay in one lump [sum].'
He reiterated our point about the financial risk to insurers being low, adding 'the cost of [premium finance] is being used, in my opinion, to reduce other costs in the insurance chain.'
Brewis also observed that average rates charged by insurers had come down recently – though 'not by a huge amount.'
Car insurance is a core focus for Which? because it's a huge and unavoidable expense for consumers – drivers are legally required to be covered.
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 have been 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.
Keeping your costs down
While car insurance premiums have been rocketing and home insurance costs are also on the rise, you may still be able to save (whether you're paying annually or monthly) by shopping around at renewal. This includes checking what your existing insurer will offer if you apply for a new quote through its website.
Once you've got this information, contact your insurer to discuss the offer. Our research has found that many insurers are open to negotiation.
Also, consider other forms of credit. If you can't afford your premium in one payment, consider other ways of spreading the cost – such as paying by interest-free credit card and paying off a 12th of the card's balance each month.
- Find out more: how to find a cheap car insurance.
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