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The FCA has announced a comprehensive review of the premium finance market. This comes amid growing concerns about rising insurance prices and the launch of the Government’s motor insurance taskforce. The FCA expects to publish an interim report following the study and proposed next steps during H1 2025, meaning stakeholder feedback will play a crucial role in shaping the final outcomes and recommendations.
Premium finance allows consumers to spread the cost of their insurance payments over time. However, with average annual percentage rates (APRs) on the amount of money borrowed ranging from 20-30%, the FCA is concerned that premium finance may not offer fair value to customers.
As part of its market study, the UK regulator will review whether the 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.
In addition to the market review, the FCA is also participating in the Government’s motor insurance taskforce. This taskforce aims to identify ways to stabilise or reduce motor insurance premiums while maintaining appropriate levels of cover.
The FCA will closely analyse the factors driving increased costs in motor insurance, including claims handling practices and the impact of different types of claims. The regulator will also examine how rising insurance prices affect various customer groups, such as younger and older drivers, those from ethnic minority backgrounds and those on lower incomes.
Who does the market study apply to?
- Current and potential suppliers of premium finance and other products that allow UK insurance customers to pay their policy premiums in instalments.
- Premium finance motor and home insurance customers.
- Providers and distributors of motor and home insurance products.
The market study should also be of interest to lenders and credit brokers who are not currently involved in premium finance at all, since the FCA’s engagement in this sector could be indicative of future interventions in the wider consumer credit market.
Why is the FCA launching this market study?
Premium finance is an important product for many customers
Premium finance allows customers who are unable to afford paying for their insurance in one lump sum to get the insurance they need, by paying in instalments. Around one-third of policyholders in motor insurance pay in instalments, compared to 36-52% in contents and / or buildings insurance.
Growing area of concern
The FCA has been monitoring premium finance with concern for a while. In 2022, it wrote to CEOs expressing its concern around premium finance products with low associated credit risk but high APRs, sometimes up to 30%. This could potentially mean some products were falling short of the FCA’s expectations that non-investment insurance products (including when sold with premium finance) represent fair value for customers.
Fair value and market competition
The regulator has identified a range of factors that raise potential concern. These include complex commercial arrangements between parties, commission structures, premium finance charges being too high relative to the credit risk and cost of providing the services, and business practices (such as how and when information is provided to consumers).
Increased premium prices causing further damage
In 2023, motor insurance policyholders faced on average a 25% increase in premiums compared to 2022, driven by factors such as inflation and rising insurance claims. This may have increased the number of people needing premium finance, or other credit alternatives, to spread their insurance premium cost. The FCA is concerned that vulnerable customers may have been severely impacted.
What makes up the scope of the study?
The study will focus on premium finance products, sold to UK consumers, in relation to motor and home insurance policies. Although premium finance can be used on other insurance products, the FCA is focusing on motor and home insurance because they are two of the largest general insurance markets. Around 27.6 million motor insurance policies were sold in 2023. Comparatively, in the home insurance market, around 16 million home insurance policies were sold in 2023.
Both products are typically considered as “essential” products. Motor insurance is mandatory, and home insurance may typically be required as part of a mortgage arrangement or where a customer views this as a necessity to protect their most significant asset. As a result, consumers in these markets are less likely to lower their demand due to price rises. This also means they’re more likely to use premium finance.
Lastly, the FCA has broader concerns about the rising costs of insurance premiums within the motor insurance market. It has stated that the findings from this market study will form one part of a broader investigation of these issues.
What are the FCA’s key objectives with this study?
Assess competition
The UK regulator will evaluate the competitive dynamics within the premium finance market, identifying any anti-competitive practices that may hinder consumer choice and fair pricing. The market structure will be examined to determine the number of players, market share, and nature of the competition.
Consumer outcomes
An important focus is on understanding how consumers are treated, including whether they’re informed adequately about costs and terms. This includes exploring potential issues with the clarity of information provided to consumers. The FCA will analyse how consumers engage with premium finance products, including its own awareness and understanding of terms, fees, and conditions.
Market functioning
The UK regulator aims to understand how the premium finance market functions, including the role of different stakeholders such as insurers, brokers, and finance providers. It wants to determine the extent to which the premium finance market is leading to poor customer outcomes, and the factors that could be driving this.
What timelines and next steps do I need to be aware of?
Market studies can result in a variety of outcomes. If the FCA find evidence of harm in the market, it will take relevant steps to address it. This could involve changes to existing rules, publishing new guidance, increasing industry self-regulation, or in the most serious of cases taking enforcement action.
The existing rules and the Consumer Duty already require firms to consider the fairness of their premium finance products. However, if the FCA finds that further action is needed, it’ll need to carefully consider the potential benefits and costs of making changes to the regulatory framework.
It’s also possible that the FCA might decide to take no further action following the market study. This could happen if it doesn’t find any evidence of harm or feels it can address any issues via discussions with relevant firms.
How can Bovill Newgate help you meet the regulator’s expectations for insurers?
We can help you take a holistic view of the interrelated elements of your business, and how they can work together to manage risk and regulation.
Our team of experienced consultants have in-depth practical knowledge of the insurance industry and can support manufacturers and distributors understand the complex regulatory requirements placed upon them.
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