Insurers exposed for pricing bias over payment preference

Customers who pay for their motor insurance in instalments via premium finance already have interest added to the cost of their cover to reflect credit risk.

However, research conducted by Post has shown some providers are pushing premiums up when customers select ‘monthly’ as their preferred payment method, regardless of whether they ultimately require premium finance for the policy to be paid for in instalments or pay for the cost in full on their own raising questions about fairness and pricing transparency.

Quote journey

During the quote journey, an insurer will ask a customer how they prefer to pay for their insurance, offering the option of monthly or in one lump annual sum.

Sarah Vaughan, director for Angelica Solutions, said: “It’s still a question in the quote journey, it does influence your premium. I checked this, I double checked that it was still the case, and it was.”

It’s still a question in the quote journey, it does influence your premium. I checked this, I double checked that it was still the case, and it was.

Vaughan provided data to back this up, suggesting some insurers are offering inflated insurance premiums for people who had ticked the ‘I prefer to pay for insurance monthly’ box even when they they then change their mind and opt for paying a single lump sum for cover.

Post carried out its own check, putting in two identical quote requests on 16 June for a male teacher living in west London driving a Hyundai I10.

The requests were made on the same price comparison website, on the same date, with the same level of cover, the same address, same name, etc.

The only differences in the quote journeys were the two different web browsers (so internet cookies were not at play), and the answer to the question “How do you normally pay for your insurance?”

When the prices came up, Post was presented with three separate prices: an annual premium price for when you say you want to pay annually, then when you say you want to pay monthly, there was the total amount you would pay in instalments plus the provider presenting a ‘saving’ if the customer went with an annual price.

For many providers, this promotional price was still more than what the annual payment would have been if the customer had only said they want to pay a single lump sum for a year of cover.

The providers highlighted in bold in the table are those charging motor insurance customers more to pay their premiums in a single lump sum if they shared they preferred to pay monthly when starting the quote.

The providers charging these customers more includes four Aviva brands, three Axa brands, five Markerstudy brands, two Ageas brands, and one product each for 1st Central and Direct Line.

However, many of these companies and providers have different tiered products and brands. For example, DLG also has Darwin and Churchill as brands listed on price comparison sites.

While some providers are inflating the one-off annual payment if a customer asks for monthly payments, some are going the opposite way and making it cheaper. 

Markerstudy has five brands offering more expensive one-off payments, but it also has Nutshell, Carole Nash, Geoffrey, Be Wiser, Dial Direct and Autonet all offering a lower one-off payment if the customer shares they prefer monthly payments.

Some brands, such as Be Wiser and Carole Nash even offer a lower total amount paid if paying monthly.

Insurers react

When asked to explain their approach to pricing, providers’ responses varied.

A spokesperson for Aviva said: “We believe our premiums and APRs are proportionate and each offer fair value.

“We take lots of factors into account when assessing risk and calculating premiums. One of the questions asked by PCWs, before a premium is calculated, is whether customers typically, or intend to, pay monthly or annually.

“It’s important to note that premiums and APRs are calculated separately. Premiums are based on the likelihood of a claim being made and the cost of any claim, and APRs are based on credit ratings. Paying in monthly instalments is a valuable option for some customers as it enables them to break down their premium into smaller payments.”

A spokesperson for 1st Central said: “We analyse hundreds of factors to determine the risk profile and set the associated price. A prospective customer’s indication of payment preference is one such factor, as it can influence the risk profile. Importantly, we aim to keep our pricing as competitive as possible for all customers.”

An Axa spokesperson added: “There are a range of factors taken into consideration when assessing a customer’s risk which helps us calculate their motor insurance premium costs. We ask a standard set of questions as part of the customer journey, which matches those asked on price comparison websites. 

“Once we have answers to those questions, we clearly display the price that a customer will pay annually, as well as monthly payment costs, which allows them to make an informed decision. Where customers choose to spread the cost of their premium across the year, we currently charge a percentage which varies depending on individual circumstances.”

Markerstudy's spokesperson said: “As an insurance broker, the prices we return are made up of two elements – the price returned from the insurer panel, and the commission we charge for our service.

“We can confirm that, typically, the commission we charge is either the same or lower for customers that indicate they would like to pay monthly. This is usually the case as we find that customers who pay monthly typically stay with us for longer and as such we can spread our costs over this longer period ensuring that we provide fair value to our customers.

“There is evidence of major market participants (particularly direct insurers) utilising questions such as 'how do you usually pay?' (or similar) to load core premiums for those customers that select 'monthly', this load is in addition to the interest charged and can be, in some instances, greater than the interest payment.”

DLG and Ageas are yet to provide their response to Post's request.

While providers claim a customer preferring to pay monthly can be seen as an indication they are a greater credit risk, surely that should only be applicable if they actually opt for paying in instalments and if they opt for a single lump sum, as is offered, that risk is no longer an issue?

Also as the table clearly indicates, there are plenty of insurers, such as Allianz, Admiral and Policy Expert offering the same one-off annual payment regardless of whether a customer prefers to pay monthly or annually, with some even offering lower prices. 

So, if they can do it, why aren’t the others taking this approach to pricing?

What is allowed

When the Financial Conduct Authority brought in the General Insurance Pricing Practice rules, the watchdog stated insurers must not differentiate price for new business and existing customers.

Originally, the regulator also said insurers must assume customers had selected the same payment method as they originally used to pay for their policy when determining the renewal.

However, after receiving feedback, the regulator dropped that requirement.

Vaughan stated: “Insurers are using it as a proxy for how you do pay, which they see time and again is indicative of risk.

“Those who pay monthly are a higher risk almost always than those who pay annually. They can’t use how you pay, whereas how you prefer to pay, or how you normally pay, is a brilliant proxy, and that has stayed there for a lot of insurers.

“Some took it and said it is a proxy they don’t want to use as when the rules came in. But not everybody did.”

While it might not be against the rules to take this approach, is it fair to the customer?

Some consumers may have opted to see the monthly cost to assess whether they would earn more interest by spreading the cost rather than parting with a lump sum?

Branko Bjelobaba, compliance expert, said providers charging customers more just based on the indication they might have preferred to pay monthly as opposed to annually is “wrong”.

“You are pricing to harm those that pay monthly, because you’re saying that their risk isn’t as good as someone that’s paying up front. Of course, that’s wrong,” he said.

“In today’s day and age, we all finance things on a monthly basis. All our bills are monthly. Why should the insurance industry rate against the customer for wanting to pay in instalments?”

While it is unclear this is an area being looked at by the FCA, the regulator is coming to the end of a market review into premium finance, and this practice could possibly be an element it considers.

Post has notified the FCA of its findings, and is awaiting a response.

The FCA’s review is believed to be released towards the end of July.