Are your monthly instalment costs fair value?

If you pay for car insurance in monthly instalments, you’ll spend nearly £100 each year for the privilege.

You’re also more likely to come from a lower income household, but less likely to shop around each year compared to motorists who pay one lump sum each year.

Premium finance makes insurance possible for anyone who can’t afford to pay for their insurance in one lump sum, and for anyone else who prefers regular monthly outgoings.

It’s also big business. The FCA’s market study in 2019, which went on to inform its pricing intervention, found premium finance accounted for 21% of non-core revenues in motor, with a range of 0.6% to 48% of non-core income from those which offered it.

The regulator could be about to sharpen its focus on the relationship between price and value for the cost of credit. Brands had better be ready.

Since October fair value rules have applied to premium financing, with new reporting measures including the range of interest rates charged to customers (even if the customer-facing firm doesn’t set them itself), how many of its customers pay in instalments, and the total charged for premium finance. Firms must complete value assessments by the end of this month.

The answers won’t exist in a vacuum. The FCA is collecting data from everyone, and it will analyse the answers to spot the outliers.

That’s why all firms should understand how their offering compares, and think about how it would answer some fundamental questions. This will matter even more when the Consumer Duty Principle enters into force, when it will no longer be enough to treat customers fairly, but rather to take a more active role in delivering a good outcome.

Questions to be ready to answer include:

• How does the cost of offering payment in instalments compare to what you’re selling it for? And is the value that your firm is adding proportionate to that amount?
• Does this differ if you’re passing on details to a premium finance lender and are not exposed to a payment default risk? Does the commission you receive as a credit broker, ultimately paid for by the consumer through borrowing costs, represent fair value?
• If the consequence of payment default is mid-term policy cancellation, then does the interest rate justify the credit risk?
• Did you choose premium finance provider partner with fair value in mind? How often is this relationship reviewed through the eyes of providing the best possible customer outcome?

This is relevant for underwriters too. If a broker is discounting a product in order to win a customer who wants to pay in monthly instalments because that’s where they make their money, is your product being sold at fair value?

So what might the FCA see when it compares firms’ submissions?

Our own data shows the average cost of credit – i.e. the difference between the annual premium and total instalment cost from a brand per same risk – is 12.2% for car insurance, or c.£96 on average premium of £786. Costs of credit from the most competitive brands ranges from 0% to over 20%. Eight brands lowered instalment costs by over 0.5 percentage points last month. Only two raised them.

The Consumer Duty Principle says there must be a link between cost and selling price There’s no arbitrary correct answer. But if the cost to your firm is 3% and the customer pays 28%, you can almost certainly expect the FCA to ask why.

Drivers who pay monthly skew towards C2DE socio economic groups with lower household incomes, and they are less likely to shop around at renewal. Both are indicators of potentially vulnerable customers for firms to consider.

The change in approach this invites is also an opportunity for innovation and large market changes. Might we see more competition between premium finance providers at a customer or brand level? Could buy-now-pay-later firms enter the sector? Could a finance agreement be arranged separately from the annual policy?

And does all of this help new players such as Urban Jungle which run monthly rolling policies without a separate credit agreement?

Fair Value Assessments are due on 30 September 2022 and the FCA has already warned that manufacturers have left it until the last minute causing a risk of harm to consumers because there won’t be enough time to make any required changes in time.

There is a clear flag that: “Should we find any firm to be non-compliant, we will consider our full range of regulatory tools to hold firms and their senior managers to account.”

The pricing walking ban in GIPP heralded huge change. What if premium finance is next under the microscope?