Insurers under fire from FCA over unclear monthly premium costs

Paying for home or car insurance in monthly instalments can add more than a third to the cost of an annual premium, the UK financial watchdog has warned, hitting out at the "failings and poor practices" of UK insurers and price comparison websites for obscuring the real costs of policies.

The Financial Conduct Authority said consumers who spread the cost of premiums by paying through monthly instalments were often unaware of fees and interest charges this attracted, preventing them from comparing the final costs of different payment options.

Known as "instalment income", consumers are being charged interest of about 30 per cent on the costs of the average annual policy if they opt to pay in instalments, the FCA found, higher than the cost of borrowing on many credit cards.

Though it stopped short of naming the worst offenders, the FCA said its researchers found "a number of cases" where information about fees and annual percentage rates was not provided, which "limited a customer's ability to make an informed choice about how to pay".

The review also identified a "wide range" of APRs being charged where consumers opted to pay in instalments - the highest being 75 per cent - underlining the importance of consumers being able to compare the true costs of different policies.

These charges have been a significant source of profits for the listed insurance sector, broker Shore Capital pointed out in a note to clients on Monday. The broker estimated that instalment charges netted about £75m for Direct Line and £23m for esure last year - equivalent to 15 per cent and 22 per cent of their annual pre-tax profits.

Neither company splits out the percentage of profits derived from instalment income, but when approached by the Financial Times, they did not dispute these estimates.

"When you look at the reliance of motor insurers on instalment income and ancillary income, it's frightening," said Eamonn Flannagan, insurance analyst at Shore Capital, who said that the typical APR for providing instalment finance was 25 per cent.

"For example, you could be quoted £1,000 for an annual motor insurance premium, payable in 12 monthly instalments of £104, meaning you've been charged nearly £250 in instalment income," he said.

The FCA said on Monday that its review of 13 insurance and 30 intermediaries including four price comparison websites showed companies "do not always provide clear and understandable information about the overall cost of paying for insurance", meaning consumers could "struggle to compare the difference" between competing policies.

Gus Park, head of motor insurance at Direct Line, said the way price comparison websites ordered quotes was something the FCA should tackle.

"There's an easy way for the FCA to stop this - make price comparison websites rank quotes by the total cost of payments," he said, adding that the price difference between paying monthly or paying annually was not made clear at present.

Mr Park said he was aware of some competitors where this price difference added 50 per cent to the cost of an annual premium.

"Some competitors will remove a discount for paying annually, as well as charging a high APR," he said, adding that Direct Line's own website was "very clear" about the difference, and typically charged an APR of 10 per cent on monthly payments.

Esure said: "This thematic review relates to a common thread in the FCA's reviews, transparency. We support transparency for consumers in all areas and believe we perform extremely well already."

The FCA said it was following up with companies where it found "specific examples of failings and poor practice" and added that it expected all companies involved to "consider the findings of the review and take action where necessary".

Additional reporting by Nathalie Thomas

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