FCA to Investigate Premium Finance Market

Following rising concerns about the increase in insurance costs, and the launch of the UK Government’s motor insurance taskforce, the FCA has announced that it will review the premium finance market.  

The FCA has published a draft Terms of Reference, which is open for ‘comment’-not consultation- until 18th November 2024, for a Market Study examining “whether people who borrow to pay for motor and home insurance are receiving fair, competitive deals.”  

Recent increases in motor and home insurance premiums and challenges brought about by the cost-of-living crisis has seen a rise in demand for premium finance as it increases insurance affordability, allowing customers to spread the annual cost of premiums over time.   

In May 2024 the Premium Credit Insurance Index revealed 71% of customers reported using credit to fund their cover- a 61% increase from two years ago. Around 32% of customers said they borrowed more to ease financial pressures, 24% said their premiums had increased, and 20% pointed to rising energy bills as a cause of the increased usage of premium finance. 

The research also found that 75% car insurance customers noted a rise in their annual bill in the past year, with around 13% reporting that premiums had increased by 20% or more. Predictably, credit use was highest among car insurance customers; 50% used some form of credit to pay for car insurance, and 15% of motorists switched to monthly insurance payments since the cost-of-living crisis.  

As demand is unlikely to waver in these key markets, despite significant price rises, and consumers are more likely to use premium finance to afford these vital products, the consumer market for premium finance is essentially ‘captive’.  

With average annual percentage rates (APRs) on the amount of money borrowed now ranging from 20-30%, the regulator is concerned that premium finance may not be offering fair value to customers and competition may not be functioning effectively.  

The study will focus on premium finance products sold in relation to motor and home insurance as two of the largest general insurance markets selling products that are widely considered to be ‘essential’, with motor insurance being mandatory and home insurance often required as part of mortgage arrangements.   

The FCA is also concerned about the impact on vulnerable customers. In its press release, the regulator states that 20 million people pay for their insurance using premium finance and links this to (fairly obvious) research which shows that 79% of adults in financial difficulty have used the product, highlighting that those in financial difficulty are much less likely to be able to afford insurance premiums in one amount.  

The regulator’s concern regarding premium finance is not novel; it previously wrote to the insurance industry at the end of September 2022 expressing unease that some premium finance products had high APRs despite presenting a relatively low credit risk.  

The study will examine whether products represent fair value, how well customers are made aware of their financing options, the role of commission, and other potential barriers to effective competition in the motor and home insurance markets.  

The FCA will also participate in the Government’s motor insurance taskforce, which aims to identify how motor premiums could be reduced or stabilised whilst ensuring that appropriate coverage is maintained.  

Whilst the study will apply to current and potential supplier of premium finance and providers and distributors of motor and home insurance products, it will be relevant to lenders and credit brokers not currently involved in premium finance as the regulator’s engagement could indicate future interventions in the wider consumer credit market. 

Firms should submit views or queries regarding the market study at PremiumFinanceMS@fca.org.uk by Monday 18 November 2024.