The Association of British Insurers (ABI) has announced a set of five new Principles aimed at managing the cost of insurance for drivers who pay monthly (using what's known as 'premium finance').
Here, we'll explain what the ABI proposes, whether we think it's likely to fix the problem, and how to bring your car insurance costs down even if you can't afford to pay annually.
The ABI's Premium Finance Principles
Members of the ABI - the main trade body for the insurance industry - have today committed to the following steps to tackle premium finance costs:
1. Transparency.2. Affordability.3. Fair value.4. Proportionality.5. Governance and Accountability.The ABI intends to publish a report by summer 2025 on the impact of its principles on premium finance for car insurance customers.
Will the ABI's steps be enough?
Recent rises in underlying car insurance premiums have exacerbated the cash cost of paying in instalments - while also making paying upfront less affordable for more drivers.
This makes the ABI's commitment to tackling the problem encouraging, but it's far from clear how effective its proposed measures will actually be.
Its five steps are all arguably requirements under existing regulations, so they are things insurers should already be doing and focusing on.
Find out more:Why insurance isn't like a credit card
The ABI's proposal (in its 'Proportionality' principle) that insurers consider credit card rates when evaluating the fairness of their monthly payment options also raises questions.
Meanwhile, among 39 car insurers we surveyed, we found the average APR charged was 23% APR - with some charging between 30% and 40% APR.
However, credit card lenders and insurance firms arguably face very different kinds of risk when offering credit. If you're £1,000 in debt to a credit card lender, for example - and fail to repay - there's a chance the lender will never see this money again. However, if you've taken out car insurance with an upfront price of £1,000 - and default on monthly payments - the insurer can cancel the policy by giving (in most cases) a week's notice.
They do face some financial losses in this scenario - especially if you've claimed. But ultimately, if you can't maintain payments, you won't receive the benefit of a full year's cover.
Consequently, we think that monthly customers paying rates similar to those offered by credit card lenders are probably being disproportionately charged considering the modest risk the insurer takes on.
Find out more:'A tax on being poor'
In a Treasury Select Committee session, where Which? appeared and gave evidence and some of our findings were quoted, an ABI representative noted that 'it's hard to sit here and say 40% feels reasonable.'
The Insurance PostHe reiterated out point about the financial risk to insurers being low, adding 'the cost of [premium finance] is being used, in my opinion, to reduce other costs in the insurance chain.'
Brewis also observed that average rates charged by insurers had come down recently - though 'not by a huge amount.'
Once you've got this information, contact your insurer to discuss the offer. Our research has found that many insurers are open to negotiation.
Find out more:source https://www.which.co.uk/news/article/industry-promises-to-change-pay-monthly-car-insurance-but-is-it-enough-ax2L74F6LHfS