Insights ¦ Premium Finance Market Study Update Paper

Key Take Aways

1. The premium finance market is integral to 48% of motor and home insurance policies, with reliance especially pronounced among vulnerable segments unable to afford lump-sum payments.

2. Premium finance is primarily utilised for its convenience, allowing consumers to spread insurance costs across multiple payment channels, including online, telephone, and in-store.

3. A significant proportion of consumers (60% motor, 41% home) pay via instalments due to affordability constraints rather than choice, underscoring the role of premium finance as a necessity.

4. The provision of premium finance varies based on distribution relationships, with larger firms self-funding or selling through internal channels, whereas smaller brokers typically utilise specialist providers.

5. Premium finance involves diverse commercial models, with APRs typically ranging from 20-30%, and nearly 20% of consumers incurring rates over 30%, often linked to distribution channels.

6. Interest rates on premium finance are notably higher compared to other credit forms, with some consumers paying APRs exceeding 30%, especially those financed via brokers and specialist providers.

7. The cost of credit in premium finance is generally higher in motor insurance than in home insurance, with over a third of home policyholders affected by no additional monthly payment costs compared to less than 3% in motor.

8. Costs incurred by premium finance providers include operational, funding, and credit risk, but revenues often surpass costs, with margins between 14% and 62%, and private insurers typically achieving higher margins than brokers.

9. The ‘double dipping’ concern — increasing insurance premiums when offering credit — is regulated against, requiring firms to justify such increases with objective, reasonable bases.

10. Consumer understanding of the total cost of bundled insurance and finance options is generally satisfactory, but comparison with alternative credit products remains challenging due to complex interest rate and APR distinctions.

11. The FCA is actively considering further analysis on high-priced products, value, and the impact on vulnerable consumers, with ongoing scrutiny of market practices and pricing fairness.

12. The regulatory outlook emphasises maintaining access to premium finance while ensuring fair value, with no current plans for a market-wide APR cap or mandatory 0% APR offerings.

Key Statistics

• 48% of motor and home policies used premium finance in 2023.

• 60% of motor and 41% of home policyholders pay by instalments due to affordability.

• APRs charged range from 20-30%, with nearly 20% exceeding 30%.

• Typical additional costs for premium finance are £19-£28 for home policies and £35-£51 for motor policies.

• Over a third of home insurance customers pay no extra for monthly payments; less than 3% in motor.

• Interest rates on credit products vary: 35% for overdrafts, 11% for £5k personal loans, 23% for credit cards, with average credit card APRs between 26-32%.

• Bad debt ratios: 0.6% (SPFPs), 1% (intermediary lenders), 1.9% (credit cards).

• Margins on premium finance ranged from 14% to 62%; insurers had the highest at 53%, with brokers at 36% in 2023.

• Nearly 20% of premium finance customers pay APRs above 30%.

Key Discussion Points

• The importance of premium finance for vulnerable consumers and its role in facilitating access to insurance.

• Variability in costs and APRs across different distribution channels and provider types.

• The relationship between premium finance and affordability, especially contrasted between motor and home insurance.

• The economic costs faced by providers versus the revenues generated, highlighting market margins.

• The potential issues of ‘double dipping’ — increasing insurance premiums when offering credit — and current regulatory safeguards.

• The challenges consumers face when comparing premium finance with other types of credit, especially around understanding APRs.

• The impact of distribution relationships, such as direct sales versus intermediated channels, on pricing strategies.

• The market’s reliance on specialist providers for smaller brokers and how this affects overall competitiveness.

• The FCA’s ongoing analysis into product value, pricing fairness, and the strategic use of non-zero APR models, including their potential impact.

• The debate on imposing a market-wide APR cap or banning commissions; current stance is that these are not appropriate measures.

• The importance of consumer protection and transparency within the credit and insurance bundling landscape.

• The forthcoming regulatory and supervisory actions aimed at ensuring fair outcomes and market integrity.

Document Description

This article is an update paper from the FCA’s market study into premium finance, launched in October 2024. It synthesises initial findings regarding the use, cost, and regulatory challenges associated with premium finance in motor and home insurance. The article explores the commercial models, consumer impact, pricing transparency, and ongoing regulatory considerations, providing insights for senior financial services managers on the current state and future direction of the premium finance market.