- Drivers who can’t afford the rising costs of auto insurance can choose to pay monthly
- But doing so means paying even more in the long term, since it involves taking out a loan.
- Now insurers are finally working to bring clarity to the premium financing market.
Insurers have agreed to make car insurance premium funding cheaper and fairer following a regulatory warning about the product.
Car premium financing is a form of borrowing that allows consumers to pay for car insurance at intervals, usually monthly, rather than annually.
However, doing so means paying more overall, which can be an additional 20 percent, for exactly the same coverage.
For example, a Peugeot 207 that costs £581 to insure with an annual payment costs £632, or 9 per cent more, when paid monthly, even with the cheapest quotes.
Now, insurers have agreed to try to make premium financing cheaper and clearer.
Adding up: Paying monthly for car insurance is more affordable in the short term, but it means motorists almost always end up paying more over the course of their 12 monthly payments.
Insurers will “attempt to manage the benefit amount charged to those paying monthly for their car insurance,” trade body the Association of British Insurers (ABI) said.
Insurers argue that car insurance has to be more expensive if paid monthly as it involves more administration and the insurer cannot use the full premium to reinvest or pay claims.
Premium financing has been criticized several times by the financial regulator, the Financial Conduct Authority (FCA).
More recently, FCA insurance boss Matt Brewis called premium finance a “poor product” in an interview with Insurance Post.
Insurers will now ensure that premium funding focuses on transparency, affordability, fair value, proportionality and accountability.
The idea is for insurers to make additional charges with premium financing clear and reasonable.
In practice, this means insurers have to provide a breakdown of what it costs to pay for cover monthly rather than annually, as well as compare finance charges for premiums.
Insurance companies will also ensure that monthly payments are fair and good value, especially as paying monthly is more common among low-income drivers who cannot afford large lump sum payments.
The FCA and insurers were considering putting a cap on how much premium funding can cost, but ruled it out as uncompetitive.
The cost of car insurance has increased tremendously regardless of how you pay.
The average premium in 2023 was £543, up from £434 in 2022, according to official figures from the insurer, and rose to £627 at the end of last year.
Mervyn Skeet, general insurance policy director at ABI, said: “The principles announced today are one of a series of actions we are taking to address the cost of motor insurance, which we know is putting pressure on households, especially those with lower incomes.
“We are doing everything we can in our power as a trade body for insurers and we hope that other organizations involved in premium financing will 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 withdrawn from sale.
GAP insurance, or “guaranteed asset protection,” covers the loss in value of a car if it is lost or stolen, as vehicles often depreciate quickly.
As with premium financing, the FCA was concerned that GAP insurance was not offering what it calls “fair value” to customers.