Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The UK’s largest car insurers have piled hidden costs on top of double-digit interest rates for customers paying in monthly instalments, according to people familiar with the practice.
Admiral and Aviva are among the car insurers that have pre-screened customers who opt to pay their premiums monthly rather than annually, one analysis of the practice found, and have raised the prices they charge such clients as a result.
So-called double-dipping is expected to be scrutinised as part of a probe by the Financial Conduct Authority into whether insurance customers using “premium finance” — or paying in monthly instalments — are being overcharged, according to a person briefed on the matter.
Matthew Brewis, head of insurance at the FCA, has described premium finance as “a tax on the poor” and the regulator is examining whether insurers’ use of the product breaches the consumer duty rules requiring them to give customers a fair deal.
As part of its probe, the FCA is examining how the choice of annual or instalment payments affects how much customers pay overall.
More than 20mn people in the UK are estimated to pay for their insurance in instalments rather than upfront, many of whom will pay annual interest of around 20-30 per cent a year on the money borrowed, the FCA has said. Its research found 79 per cent of adults in financial difficulty use such premium finance.
“Double-dipping” has added another layer to already elevated costs faced by motorists who pay monthly.
Online applicants for motor insurance are typically asked twice whether they want to pay in monthly or annual instalments. If they select “monthly” the first time, sources familiar with the practice told the Financial Times, they may be quoted a higher figure and charged a higher price — even if they ultimately opt to pay in annual instalments.
Thomas Bateman, an analyst at Mediobanca who has studied the practice, said that some of the UK’s biggest car insurers appeared to have used the screening strategy.
“Customers may struggle to make a good financial decision, given a portion of the cost of paying monthly is hidden,” Bateman told the FT, adding that the FCA is “looking for areas where there are obstacles to customers making good financial decisions. This seems like exactly that”.
Admiral and Aviva dispute that they have any hidden costs. However, their online information pages for customers on criteria that could push up the cost of insurance — such as driving history or address — does not include whether a customer chooses to pay monthly or annually. The companies said the criteria listed online is not exhaustive.
Aviva said in a statement: “We take into account lots of different factors when calculating a premium that reflects each customer’s risk. If a customer then chooses to pay monthly, alongside their insurance premium they are also provided with an [annual percentage rate] which represents the cost of providing credit.”
“We believe our premiums and APRs are proportionate and offer fair value,” Aviva added. “The vast majority of customers purchase motor insurance through price comparison sites which use a standard set of questions. None of these questions are hidden.”
Admiral said: “Providing competitive cover for the largest number of customers is important to us and we use a range of factors to ensure that the premium that we charge best reflects the risk that a customer presents.”
“We offer customers the flexibility to pay monthly and we make it clear what customers will pay whether they choose to pay monthly or annually so they can make an informed decision. We continually review our products to ensure they offer fair value relative to the claims risk.”
The FCA declined to comment.
A study published on Tuesday by Which? found that UK car insurers charged an average APR of 22.84 per cent for premium finance, with some providers charging rates the consumer group said were “comparable to pricey credit card lenders”.
Insurers say the higher costs of premium finance reflect credit risk and administrative costs, and that the product helps more low-income customers access insurance.
Admiral told analysts on an earnings call earlier this month that the APR on its policies is 17 per cent. Aviva said that its average retail APR is 15 per cent, and that its maximum APR charged for car and home insurance is 19.9 per cent.
The FCA launched a competition market study last October to examine whether people who borrow to pay for motor and home insurance in monthly instalments are getting a fair deal.
Following a 25 per cent jump in average car insurance costs in 2023, the regulator said more people would need to pay for it through instalments. “Our concern is that the premium finance market is falling short of the standards we want to see from firms,” it said.
The watchdog, which is part of a government task force looking at car insurance costs, expects to announce an update on its study by the end of June.
https://www.ft.com/content/21c1a4e9-0525-481f-82f8-c7523d417b24
