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ABI takes action on monthly motor premiums but ditches plan for industry-led cap
Members of the Association of British Insurers (ABI) have published new Premium Finance Principles, aiming to ‘outline fair practice’ and demonstrate a commitment to managing costs for customers paying monthly for motor insurance- in place of a previously suggested voluntary, industry-led premium cap.
The principles revolve around five elements: transparency, affordability, fair value, proportionality, and accountability. According to the ABI, the principles will ensure any charges made to customers who choose to pay monthly for cover are made completely clear and reasonable, relative to the cost incurred by the insurer for providing the option.
The cost of motor insurance has received greater focus and scrutiny since inflation led to a significant increase the cost of premiums- a 25% rise in 2023, according to ABI’s figures. The industry continues to consider how to ease affordability pressures for consumers whilst remaining competitive; EY estimated that in 2023 insurers incurred £1.14 for every £1 paid in premiums.
In February, ABI released a 10-point action plan setting out the steps industry was taking to combat rising motor insurance costs, part of which focused on premium finance.
The body also discussed introducing an industry-led cap on premium finance charges with the FCA, but this was deemed unfeasible within the limits of competition laws. Alternatively, the principles ‘provide a basis for firms to take meaningful action’, according to ABI. The body will publish a report by summer 2025 on the impact of the principles on premium finance for motor insurance customers.
Mervyn Skeet, Director Head of General Insurance policy at ABI 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’re also looking to investigate policy steps that could help low-income households specifically, as well as deliver on our broader Roadmap to tackling costs. This includes a call on the government to reduce insurance premium tax (IPT)”
In response to ABI’s announcement, Which?, who recently called for the FCA to intervene to protect consumers facing APRs of up to 40% when paying monthly for car insurance, argue more should be done. Rocio Concha, Director of Policy and Advocacy at Which?, said:
“Whilst it’s good to see the insurance industry finally recognising that this is a problem, waiting another year for the ABI to publish its findings when insurers should already be doing this is no good enough.
“The FCA needs to make clear where insurance companies’ pricing practices are failing to meet fair value requirements and set deadlines for firms falling short to fix this”.
The Premium Finance Principles:
Transparency: Insurers should provide a clear comparison of the total cost of paying annually and the total cost of paying monthly, and publish up-to-date, clear information about their common or average premium finance charges.
Affordability: Insurers should consider that many consumers cannot afford to pay the total annual cost of cover upfront, and that charges for monthly payments could hit the poorest, hardest.
Fair value: Insurers must ensure that costs associated with monthly instalments represent fair value, considering how income from premium finance compares to their income on the core premium.
Proportionality: Insurers should ensure charges are reasonable, relative to the costs incurred by providing premium finance for monthly payments. They should also consider charges relative to comparable and accessible alternative payment options (i.e. credit card).
Governance and Accountability: Insurers must regularly review the cost of premium finance to customers using suitable information or data to ensure any charges remain appropriate. They should ensure the right level of senior management accountability for their approach to premium finance charges and the impact on consumers.