The cost of paying car insurance on a monthly basis could fall, after the industry committed to tackle the 'poverty premium' for those who can't afford to pay upfront.
Insurers have agreed with the industry trade body to take a number of steps to manage the cost of providing cover for motorists opting to pay monthly.
When buying car insurance, drivers can choose between paying upfront in one lump sum, or they can choose to pay in monthly instalments.
However, drivers who opt to pay monthly for car insurance can expect to fork out over £300 more per year compared to those who can afford to pay in one go.
The Association of British Insurers (ABI) explained that when customers pay a lump sum, the money is made immediately available to the insurer, which can then invest this into its business and help maintain enough funds to pay out claims and keep premiums lower. However, this can’t be achieved in the same way through monthly premiums.
A recent investigation by consumer champion Which? also revealed the average interest rate added to premiums for paying monthly came to 23.37% for the 27 providers who disclosed their prices. However, some motorists were charged up to 40% APR for the privilege.
The “eye-watering” costs have been dubbed a “poverty premium”, while Matt Brewis, head of insurance at the Financial Conduct Authority (FCA), labelled the discrepancy “a tax on being poor.”
Brewis, alongside David Mendes da Costa, policy manager at Citizens Advice, and Rocio Concha, director of policy and advocacy at Which?, gave evidence to the Treasury Committee during a probe to see what steps the industry is taking to keep insurance cover affordable, as premiums rose 25% in 2023.
Premium Finance Principles
Members of the ABI have agreed to the Premium Finance Principles with the aim of managing the cost of paying monthly for motor insurance.
A collection of brokers, third-party finance providers and motor insurance providers agreed to adhere to the following:
1) Transparency
Insurers should provide a clear comparison of the total cost of paying annually and the total cost of paying monthly. They 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 take into account that many can’t 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’.
4) Proportionality
Insurers should ensure that charges are reasonable, relative to the costs of providing premium finance for monthly payments, and comparable to alternative payment options, such as a credit card.
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.
Timescale of improvement is ‘not good enough’
The trade association announced it will publish a report by the summer of 2025 analysing the impact of these five ‘principles’ on motor insurance customers.
However, Concha of Which? lamented the time it will take for drivers to see the impact of the changes, saying the timescale of the summer report next year “is not good enough.”
Concha 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.”
She added: “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.”
‘ABI is doing all it can’
Mervyn Skeet, director and head of general insurance policy at ABI, said the principles are part of “a raft of actions we are taking to tackle the cost of motor insurance, which we know is putting pressure on households, especially those on lower incomes.”
Skeet said: “We are doing all that we can within our reach as a trade body for insurers and hope that other organisations involved with premium finance follow our lead.”
He added: “We’re also looking to investigate policy steps that could help low-income households specifically, as well as deliver on our broader roadmap to tackling costs. This includes a call on the government to reduce insurance premium tax (IPT), especially when they are bringing in record tax revenues as a result of higher prices.”
