Premium Finance Market study

General insurance pricing continues to be a focus for the Financial Conduct Authority (FCA) and Government.

The FCA has issued terms of reference for a Market Study on the provision of premium finance to see whether people who pay their motor and home insurance premiums over time using instalments are receiving fair and competitive deals. The opportunity for firms to provide their views on the scope of the study closed on 18 November 2024.

The Government has also recently announced that it is establishing a motor insurance Taskforce, which includes the FCA, with the aim of identifying any actions that may stabilise or reduce motor insurance premiums, while maintaining appropriate levels of cover.  

Motor insurance is a compulsory requirement when driving a car and can be vital for accessing work opportunities. According to the FCA, motor insurance premiums have grown by an average of 21% since June 2022, which we are told is considerably higher than in comparable economies such as Germany, France, Spain and Italy.

The Taskforce’s group of experts will analyse the causes of increased costs in motor insurance and will look closely at claims costs and factors impacting these. They will also analyse the impact of rising insurance prices on different customer groups, such as younger and older drivers and those from ethnic minority backgrounds or on lower incomes.

Since 2018 onwards the FCA has taken steps to strengthen its rules on general insurance pricing practices and product governance. In 2021 it introduced PROD 4 to help ensure that products offer fair value and that customers are getting good outcomes, added ICOBS 6A to help ensure customers receive timely and clear information on the cost of premium finance and added ICOBS 6B to prohibit ‘price walking’ at renewal. More recently it introduced the Consumer Duty in 2023 and the requirement for retail customers to receive fair value. The FCA published findings from a review on fair value frameworks in November 2023.

This latest Market Study may also remind insurance providers about the product governance issues identified from the FCA’s Thematic Review TR24/2 published earlier this year - the ‘Product Oversight and Governance thematic review – General Insurance and Pure Protection (PROD 1.4 and PROD 4).’ That review identified, amongst other things, that some manufacturers are not adequately assessing and evidencing that their products deliver fair value and good outcomes, and are not identifying any instances where their products are not delivering fair value for customers; and that some distributors do not fully understand their responsibilities to consider their remuneration, its interaction with the services and benefits they provide, and its impact on the product’s value.

The FCA refers, in the terms of reference for this new Market Study, to its letters sent to CEO’s dated June 2022, and September 2022 addressing the relatively high annual percentage rates (APRs) for premium finance products compared to the low credit risk of the products. The FCA was concerned that rising motor and home insurance premium prices may be making the situation worse, as more people (in particular, vulnerable customers) seek to use premium finance.

This new Market Study on premium finance was launched because the FCA is increasingly concerned about the rising costs of motor and home insurance premiums and the higher costs faced by customers paying these premiums by instalments. Stated concerns include that the cost of premium finance may not reflect the providers true cost of providing instalments as a payment method, nor represent fair value and disproportionately impact on the customers least able to afford the increased costs including vulnerable customers.

The FCA states that some customers can be charged as much as an additional 30% (APR) on top of their insurance premium just for paying by instalments. It is estimated that over 20 million people pay their insurance premium by instalments, with outstanding premium finance loan balances exceeding £5 billion and revenue generated from this product around £1.2 billion.

As part of its Market Study in to the provision of premium finance, the FCA will review whether the products represent fair value, how well customers are made aware of their financing options, the role of commissions and other potential barriers to effective competition in the motor and home premium finance market.

The premium finance Market Study is part of a wider program of the FCA’s work to understand and address issues with motor insurance business models, and to evaluate the pricing rules introduced in 2022 to address harm identified by the General Insurance Pricing Practices (GIPP) Market Study.

Potential outcomes of the Premium Finance Market Study:

Addressing harm: firms must already comply with existing rules (including those in PROD, ICOBS and PRIN 2A on the Consumer Duty) on providing fair value, adequate information, and ensuring remuneration doesn’t influence third-party distributors.  However, should any harm be identified, the FCA’s intervention might include rule changes, guidance issuance, supervisory actions, firm-specific remedies, or enforcement action.

No action: no further action may be taken if no harm is identified or if agreed measures during the study resolve potential issues.

Steps being taken by industry bodies

The Association of British Insurers (ABI) announced in April 2024 that its’ members have committed to taking steps to try and manage the charges that customers pay for the benefit of paying monthly for their motor insurance.

The steps that ABI members have agreed include following five Premium Finance Principles that underline what fair practice should look like, and revolve around the following five elements: Transparency, Affordability, Fair Value, Proportionality and Accountability.

The ABI states that in complying with the Principles its members premium finance charges should be made completely clear to consumers and be reasonable, relative to the cost incurred by the insurer for providing the option. Insurers should also consider charges relative to comparable and accessible alternative payment options such as a credit card, and that the costs associated with monthly instalments must represent fair value. Insurers should consider how any income from premium finance compares to their income on the core premium charged for the insurance cover.

Motor insurance affordability is one of three highlighted consumer issues in the ABI’s Financial Inclusion Strategy.

The ABI has also committed to publish a report by summer 2025 on the impact of its Principles on premium finance for motor insurance customers.

Steps that premium finance providers may take include the following:

Manufacturers: oversee and challenge product value robustly; use relevant management information (MI) and analysis; make evidence-based judgments on value aligned with regulatory rules; proactively identify and address value problems to manage and remediate harm.

Distributors: understand and align with the manufacturer’s strategy and target market; implement controls to ensure products reach only the intended target market; evaluate how their activities and remuneration affect product value and strategy; identify and promptly address distribution or value issues that may harm customers.

When carrying out a fair value assessment (FVA) consider the following:

• ensure that premium finance is assessed as part of the core product FVAs
• consider and include the relationship between the price and the quality (such as the benefit of spreading the cost). The APRs charged and associated credit risk for the product (noting policies can be cancelled in the event of non-payment)
• the total price customers pay, including all price components such as: operating costs (e.g., claims handling, administration); distributor remuneration (e.g., commissions and fees); how these price elements justify and are aligned with fair value
• check that prices of an insurance product that can be purchased using premium finance are not increased based on the customer’s vulnerability or any protected characteristic (unless permitted under the Equality Act 2010) unless the firm has an objective and reasonable basis for making any such change
• check that information provided is clear about the additional cost of any premium finance arrangement and that this makes the insurance contract more expensive
• evaluate if distributor remuneration is reasonable and consistent with providing fair value. In doing this assess the services provided by distributors relative to their remuneration and all forms of remuneration, such as profit commissions and check for conflicts and misaligned incentives
• the controls necessary to address commission increases tied to premium rises, which could reduce product value over time
• review products annually or more frequently if the product risks warrant it
• ensure the FVA is detailed and clearly documented to demonstrate compliance with regulatory requirements and meets FCA expectations. Ensure the appropriateness and depth of supporting evidence, such as meeting minutes and internal discussions on product value.

Contact us: should you wish to discuss anything mentioned in this article please do not hesitate to contact us.