Paying monthly for your car insurance has always been an expensive business.
Most car insurers insist that you pay your full year’s premium upfront. But if, like many, you can’t afford to do that – then insurers or brokers will lend you the money and allow you to pay back your loan, plus interest, in monthly instalments.
With car insurance premiums rising by more than 60 per cent over the past year, growing numbers of people are faced with no choice but to pay monthly.
The additional interest – typically over 20 per cent – adds real insult to injury. Effectively, the car insurance industry places an extra tax on its poorest customers and in some cases, it’s not just interest that is added to the premium.
Some insurers also use it as a risk factor – concluding that those who choose to pay monthly are riskier drivers, and so increase their premium even before adding the interest.
Over the past year, a growing number of insurers have stopped offering quotes to people who want to pay monthly altogether – piling further pain onto the instalment payers by reducing competition for their business.
One element that seems distinctly unfair is that interest rates often don’t fall as premiums rise.
Car insurers tend to have fixed percentage interest rates. If they charge 20 per cent and I pay £500 a year for my insurance, then the interest will be £100. But if you pay £3,000 a year, the interest will be £600.
However, in other credit markets – like personal loans – the interest rate falls the more you borrow.
As a result, the additional cost in pounds and pence for those have the highest annual premiums is significant.
This practice of lending customers their annual premium is known as “premium finance”. In sectors such as travel insurance and pet insurance, there’s rarely any extra cost for paying monthly. Even in home insurance, it’s much less common than in the motor market.
So why when it comes to car insurance – the most expensive insurance for most people – are firms penalising customers who often have no other choice but to pay in instalments? The idea seemed to gain real traction in the early 2000s and has since spread like wildfire. For both insurers and brokers, it was an easy way of bolstering their margins. But I’ve not yet found any compelling reason why premium finance needs to exist – other than to improve the returns of insurance company shareholders.
This elephant has been hiding in plain site for quite some time. But two factors have been pushing it up regulators and policymakers’ agendas over the past six months.
First, the combination of rising car insurance prices and the broader cost of living squeeze mean that more people are genuinely struggling to afford their car insurance. For the first time in my 25 years working in this industry, the cost of car insurance is being discussed by frontline politicians and looks set to be part of the debate in this year’s election campaign.
Secondly, the FCA’s new Consumer Duty – which came into force last July – puts a new responsibility on firms to prove that they are working to deliver good outcomes for their retail customers.
I’ve not heard a single argument that articulates why premium finance is a good thing for consumers. This week, the FCA’s head of insurance suggested that it could be ready to take some action in this area imminently.
Don’t expect radical change overnight though. Insurers are busy reminding regulators and politicians that they are struggling to make a profit in the current market, and any further assault on their margins may tip the balance and force them to pull out of the market altogether.
Given that we’ve already seen big insurers including Royal Sun Alliance and Zurich step away from the car insurance market over the past year, this may not be an entirely empty threat.
Nevertheless, I hope politicians and regulators have the courage to take action soon. A ban doesn’t need to come into force immediately – but it is surely where we must end up. In the meantime, if you’re struggling to pay your annual car insurance premium in one go, consider taking out a 0 per cent credit card – which will give you the breathing space to pay it back without any interest.
James Daley is managing director of the consumer group Fairer Finance
