Some firms ‘earn much more money than it costs to provide pay monthly insurance’

Some firms earn much more money for providing insurance premiums paid by customers in monthly instalments than the cost of providing the cover, the regulator has said.

Some “pay monthly” customers may also face a higher charge for the underlying insurance premium – a practice sometimes described as “double dipping”.

Concerns have been raised that the decision to pay monthly may be factored into the pricing of the underlying insurance premium itself.

The Financial Conduct Authority’s (FCA) rules require firms should not increase the insurance premium to customers using premium finance without objective and reasonable basis for the change.

Some insurers have said the choice of payment method is correlated with insurance risk for those paying monthly.

The FCA’s update paper on its premium finance market study said: “If we see evidence of firms not having an objective and reasonable basis for taking such an approach, we will consider our supervisory approach on a firm-by-firm basis.”

The update added: “Where firms charge for premium finance, revenues appear to materially exceed costs for some providers.

“Whereas the profit margin earned on a core insurance policy may be relatively low, we see margins on premium finance that are somewhat higher.

“Different business models will have different ways of recovering costs.

“In some cases, they recover all costs through the insurance product itself, or recoup returns on lower margin insurance product through higher APRs (annual percentage rates).”

Get a free fractional share worth up to £100.
Capital at risk.

Terms and conditions apply.

Go to website

ADVERTISEMENT

Get a free fractional share worth up to £100.
Capital at risk.

Terms and conditions apply.

Go to website

ADVERTISEMENT

The FCA’s analysis found premium finance margins (revenue less economic costs as a proportion of revenue) ranging between 14% and 62% across insurers, intermediary lenders, intermediary brokers and specialist premium finance providers (SPFPs) in the period between 2018 and 2023.

SPFPs averaged the lowest margins out of these four, with a weighted average margin of 24% between 2018 and 2023.

Insurers had the highest weighted average margins of 53%, the regulator said.

Financial Conduct Authority”>

Firms offering premium finance incur some operational costs, for instance staff, IT and compliance.

Lenders also incur funding costs or must sacrifice investment income by delaying the date of full payment, it added.

Consumer credit products are also priced to compensate firms for high levels of bad debt or default, among other costs.

The update said: “Nevertheless, we find that some bad debt is incurred by premium finance lenders (with the ratio of bad debt to loan balanceranging from 0.6% for SPFPs to 1% for intermediary lenders) but not at the levels of other consumer credit products (1.9% for credit cards based on a sample of retail banks).”

The FCA said premium finance is an important way of paying for insurance, and in 2023 it was used for around 48% of motor and home policies.

For some consumers, premium finance is a choice, but for many, especially those in more vulnerable groups, it is a necessity because they cannot afford to pay annually, the regulator said.

In 2024, 60% of motor and 41% of home (buildings and contents combined) policyholders who paid by instalments did so because they could not afford to pay in a single annual payment, it added.

There is wide variation in the rates firms charge for paying by instalments.

Typically, when firms charge extra for premium finance, the APRs are in the range of 20% to 30% but almost 20% of consumers pay more than 30%, the report said.

Around 60% of consumers pay headline APRs that are between 20% and 30%.

This would cost an extra £19 to £28 on an illustrative home policy and £35 to £51 on an illustrative motor policy – suggesting that it costs consumers typically between 8% and 11% more to pay monthly rather than annually, the regulator said.

Interest rates on consumer credit vary across products and between consumers, but these APRs compare with monthly advertised interest rates in 2023 of 35% for overdrafts, 11% on a £5,000 personal loan and 23% for credit cards issued by financial institutions as reported by the Bank of England, the FCA’s paper said.

It added: “Our own data, which captures a larger proportion of the market including cards marketed as ‘credit builders’, shows average APRs on new credit card agreements ranged between 26-32% at the end of 2023.”

The cost of paying monthly also differs substantially between motor and home insurance, the FCA said.

More than a third of home insurance customers pay no more for paying monthly than annually, compared with less than 3% of motor insurance customers.

Some firms have indicated that cancellations and changes of policy tend to occur at a higher rate in motor than home, which leads to higher costs for providing motor insurance premium finance, the regulator said.

Zero per cent finance options for home insurance also seem to be more common than in motor insurance in part because there is greater prevalence of buying direct from the insurer, enabling firms to more easily offset the funding and operational cost of offering monthly payments.

The FCA now plans to carry out further analysis to look more closely at higher-priced products, the value these products provide, profitability, and the extent to which these prices are paid by vulnerable customers.

Where it finds products with prices which are not reflective of the value offered, the regulator said it will be challenging firms to make sure they have considered all these aspects fully.

The FCA will also investigate the extent to which consumers can effectively compare premium finance with other credit products.

Its premium finance market study was launched in October 2024 as part of wider work on motor and home insurance, following concerns that premium finance may not represent fair value for some customers and that competition may not be functioning effectively.

The FCA’s findings are based on evidence and data that it has gathered from a request for information (RFI) from a sample of firms.

It is seeking comments to further inform the next phase of the market study, and is inviting views to be sent by 5pm on September 30 2025.

Graeme Reynolds, the FCA’s director of competition, said: “Premium finance is important because it allows customers to spread costs, making premiums affordable and providing a flexibility.

“But we found that some firms charge higher interest rates, and some, much more money than it costs to provide it.”

He said that issues will be tackled through the Consumer Duty, with a final report also being published by the end of 2025.

Mr Reynolds continued: “Any time we intervene, we need to ensure we are acting carefully, with an evidence-based rationale and being mindful of any unintended consequences.

“We set out some things that we won’t be doing in premium finance, and we can confirm that for the time being, we won’t be putting in place a single market-wide cap on APRs.

“That’s because some higher APRs may legitimately reflect costs for some consumers, due to the wide range of business models at play in this market.”

Rocio Concha, Which? director of policy and advocacy, said: “Too many home and motor insurance customers pay for cover monthly not through choice, but out of financial necessity.”

She said that a “clear signal that bad practice will not be tolerated” must be sent out.

Association of British Insurers (ABI) director general Hannah Gurga said: “Having the option to pay for insurance in monthly instalments can provide flexibility for those who need to manage their budgets.

“Offering this service does involve costs for insurers and firms also have to keep cover in place for a period of time if a payment is delayed or missed.

“Our premium finance principles, which we published last year, outline that any charges should be fair, transparent and reflective of the costs that the insurer faces.

“We’ll continue to work with our members on this matter and engage with the FCA’s review.”