Car insurers to make pay monthly cheaper and fairer after warning about ‘poor product’

Insurers have agreed to make car insurance premium finance cheaper and fairer following a regulatory warning about the product.

Car premium finance is a form of loan that lets consumers pay for car insurance in intervals, normally monthly, rather than yearly.

However, doing so means paying more overall, which can be 20 per cent extra, for the exact same cover. 

For example, a Peugeot 207 that costs £581 to insure with a yearly payment costs £632, or 9 per cent more, when paying monthly, even going with the cheapest quotes.

Now, insurers have agreed to try to make premium finance cheaper and clearer.

Insurers will ‘try and manage the amount that those paying monthly for their motor insurance are charged for the benefit’, the Association of British Insurers (ABI) trade body said. 

Insurers argue that car insurance has to be more expensive if paid for monthly, as there is more administration involved and the insurer cannot use the entire premium to reinvest or pay claims.

Premium finance has come under fire several times from the financial regulator, the Financial Conduct Authority (FCA).

Most recently, FCA head of insurance Matt Brewis called premium finance a ‘poor product’ in an interview with Insurance Post.

Insurers will now make sure premium finance focuses on transparency, affordability, fair value, proportionality and accountability.

The idea is that insurers will make the extra charges with premium finance clear and reasonable. 

In practice, this means insurers have to give a breakdown of what it costs to pay for cover monthly as opposed to yearly, as well as how premium finance charges compare.

Insurance firms will also make sure monthly payments are fair and good value, especially as paying monthly is more common among lower-income drivers that cannot afford large lump sum payments.

The FCA and insurers were considering a cap on how much premium finance can cost, but ditched this as being uncompetitive.

The cost of car insurance has risen hugely regardless of which way you pay.

 The average 2023 premium was £543, up from £434 in 2022,according to official insurer figures, with this rising to £627 by the end of last year.

ABI director, head of general insurance policy Mervyn Skeet said: ‘The principles announced today are one 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. 

‘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.’

The car insurance market was rocked by FCA action in February this year when 80 per cent of GAP insurance deals were pulled from sale.

GAP insurance, or ‘guaranteed asset protection’, covers a car’s loss in value if it is written off or stolen, as vehicles often depreciate quickly. 

As with premium finance, the FCA was concerned that GAP insurance was not giving what it calls ‘fair value’ to customers.