Motor insurance: Pay as you go?

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Motor insurers have faced a barrage of bad publicity over the costs associated with spreading premium payments over a year, rather than in one lump sum. Jakki May reports on the issues.

Motor insurers would be forgiven for feeling a little battered after last year's barrage of bad publicity over the question of premium payments. The problem, it appears, stems from the rising number of insureds who would rather spread their premium payment across the year rather than paying in one lump sum — something that is a natural reflection of the recessionary times.

However, it also appears that some of those insureds have been caught off-guard by the cost of changing from annual to monthly payments. This in turn has given some of the consumer press a golden opportunity for a bit of insurer bashing, with claims that monthly payments can add up to £63 to the average £526 a year premium.

Much of this has been fuelled by the historical low base rate of 0.5% and then the seemingly comparative high interest charges on motor premiums. Stories abounded throughout the year with the Mirror newspaper story of last autumn typical of many. It produced a table of "offenders", headed by Virgin Money with charges of 25.1% and The AA with charges of 24.9%.

Higher costs

The article quoted Steve Sweeney, head of motor insurance at online price comparison site Money Supermarket, saying: "The reality is that the costs you are being charged for paying monthly are nothing like how much it actually costs the insurer to give you this credit. Insurers quote cheap policies to lure you in but, once you look at the real cost, it's often much higher."

Ian Crowder, on behalf of AA Insurance, argued that the APR did not just include the cost of the money but also the costs associated with the number of monthly policies cancelled before the year is up. He reports a 17% rise in such cancellations. While most of these are for genuine reasons, he also warns that some people are under the flawed impression that they can cancel the policy but keep the certificate. This type of fraud is now easy to spot — although perhaps it is another sign of recession that more people are prepared to take such a risk.

Combined with the bad press, a report from Datamonitor, commissioned by the AA, added fuel to the fire by suggesting that monthly interest charges were not sustainable.

The report claimed consumers' growing value awareness and the financial difficulties in which many find themselves will ultimately force insurers to cut back on these charges as part of a marketing ploy to keep market share. It claimed 38% of survey respondents said that they were looking at ways to reduce their insurance premiums, while 34% said that they use price comparison websites in order to find the cheapest premiums.

However, Datamonitor does acknowledge that with approximately 13.2 million customers paying for their car insurance monthly, this is a significant revenue stream for some market players.

In response to all of this, the insurance sector has been working behind the scenes to devise an adequate response. It believes many of the problems have actually stemmed from a lack of clarity and understanding on behalf of consumers. If they had properly understood the situation from the outset they could have made a better-informed decision and then happily accepted the charges.

As the year ended, the Association of British Insurers, together with the British Insurers Brokers' Association, the consumers' association Which?, and leading insurance comparison websites, produced a set of guidelines, designed to improve consumer information and understanding.

The guidance aims to improve several key areas, including policy information, add-ons, excess levels and referrals. It states customers should be able to review key features of their selected policy before they commit to buy and that it should be made clear what cover is provided as standard, and which features are being sold as any add-ons, such as home emergency cover under household insurance. It also says the level of any voluntary or compulsory excess should be prominently displayed and clearly explained, and that customers to whom a quote cannot be offered should be directed to possible alternative sources of help, such as specialist providers.

Nick Starling, the ABI's director of general insurance and health, says: "Using the internet can enable consumers to get the best policy at the most competitive price. But the ease and speed of going online must be balanced with ensuring that people understand the terms, conditions and cover of the policies they are comparing.

"These guidelines will help ensure that customers get the best possible deal when buying general insurance products online, and we urge all online insurance providers to adopt them without delay."

Dan Moore, insurance expert at Which?, adds: "Which? supports measures that will lead to greater transparency and trust, and will, therefore, benefit consumers. The ABI good practice guide is a step in the right direction, providing the recommendations made are monitored and enforced."

And this seems to be the general message from across the industry. A spokesman at Zurich, says: "Zurich and Zurich Connect do charge customers an additional 8.6% for paying by direct debit. We do make it clear to customers at the time of the quote the different payment options. We would encourage all insurers to show this transparency to the customer to ensure their payment options are clear when they buy a policy."

He also says that different insurers will have different attitudes on this issue, often based on the demographic of their individual customer bases. At Zurich, he says, the customers tend to be slightly older and they, therefore, often have lower premiums to start with. Many will use their credit cards to pay for insurance, to take advantage of loyalty schemes on those credit cards or the interest free deals available. As a result, he feels that, at the moment, Zurich customers are pretty evenly split between annual payers and those on direct debit.

Individual circumstances

Biba's technical and corporate affairs executive Graeme Trudgill, agrees that much of this issue rests with the individual circumstances of the insured. At a time when cash flow is tight, premium finance becomes a much more attractive option. He says the new guidelines are very much a reflection of the need to be transparent, particularly at a time when every penny counts and when consumers are critically aware of all elements of the overall cost.

But Mr Trudgill says it is also about making sure the industry conforms with its regulatory requirements and about covering the rising costs of defaults. "There are a lot more defaults at the moment and you need to cover those costs."

He stresses that premium finance has been around for years and offers a hugely successful option for those who would rather not pay in one lump sum. Much of this, he says, is not really about the availability of premium finance but about the reputation of the industry.

"We want to do everything we can to explain the benefits of monthly payments to the insureds. At the end of the day, there is a cost to credit but if insurance brokers and direct writers can make this clear, then insureds are in the right position to make informed choices," he explains.

A spokesman for the ABI echoes this, saying that it is an issue of transparency and that it is important for industry to work together to be able to counter the media stories and improve the reputation of the sector as a whole.

Customer rating

Mike Keating, managing director of personal lines intermediaries at Axa, says that less than 10% of insureds use its instalment plan, however many more will have bought insurance using a broker's scheme. So he feels it is something that needs to be addressed by more than just the insurers. He also says that consumers have to understand that premium finance is just like any other form of credit — the consumer will have been rated before a price is quoted.

It is also more likely that those who need premium finance arrangements have a lower credit score and, therefore, will find credit more expensive to buy, because of the associated risks of a low score. In turn, those paying annually will have a higher credit score and will, therefore, attract the lowest available premiums.

Though that may sound harsh, it is an economic reality, Mr Keating says, and has to counter the increased risk of default from those in the higher risk categories. He is seeing an increased use of credit cards as consumers become more savvy about the options — and are able to use interest free deals to their advantage.

Despite all the recent media attention on the issue, Mr Keating firmly believes that consumers look firstly at the premium price and will choose an insurer accordingly. Only later in the transaction do they consider that cost of finance — again often changing tack to ensure they pay the lowest figure.

He says much of this will be handled by the brokers, who he feels have the responsibility to make the final costs clear to the customer from the outset. Mr Keating believes that brokers are aware of those responsibilities and are equally aware that they must maintain a good relationship with clients if they are to remain successful.

While there may be some who fail their insureds in this respect, market competition will ultimately sort the good from the bad. "I think the broker market is pretty good at making it clear what the costs are," he adds.

However, there is some criticism of the aggregator sites, which hook insureds in before making it clear what the extra costs will be.

Speaking as the new guidelines were published, Hayley Parsons, chief executive officer of Go Compare, said: "We welcome any initiative that will ultimately enhance the buying experience for the consumer. Comparison sites have added a new level of transparency for the consumer and buying insurance online has never been easier.

"However, comparison sites are very much dependent on the information that the insurance company provides, so establishing industry standards that all insurers, brokers and comparison sites can adhere to when displaying product information can only be a good thing."

Expanding on this, she stresses that such sites are only as good as the information provided. Until last year, Go Compare did not show any instalment plans on its site at all, because of her concerns around the consistency of information provided by the insurers.

"The biggest problem is consistency in the way insurers and brokers calculate how much instalments will cost. There are so many variables in any transaction. Some will charge over 10 months, others over 12, some will want a higher deposit than others and, of course, everyone has different interest rates.

"It is a bit of a minefield," she concludes. For her, the trickiest element is add-ons. Some insurers want those included in the deposit while others will roll them in with the overall policy instalments. And, of course, each insured is free to choose a raft of different add-ons, making consistency all the harder to achieve.

Massive uptake

Go Compare has seen a massive uptake in the numbers of insureds requesting quotes — and also in those who then buy a policy. But Ms Parsons says it is impossible to know the proportions who then choose either to pay by cash, cheque or credit card for an annual payment or those who choose the monthly direct debit option.

For her, though, this is really about a bigger issue all together. "For years, insurers and brokers have used aggregators as an excuse, blaming them for all evils and not taking any responsibility.

"For me, the biggest success of last year, and in producing these guidelines, is that we got the ABI, Biba, insurers, brokers and aggregators all sitting at one table. It was easy to blame comparison sites but being in the same room and being able to open people's eyes about the issues was excellent. We have been able to show that we all need to take responsibility."

Ms Parsons is quite driven in her view that there is a real need to break down the barriers between distribution channels and instead to start working as an industry to deliver as transparent a service as possible to the end consumer.

She concludes: "At the end of the day, different policies will suit different people. Everybody will try to find the best option for their personal circumstances. Our job is to make those options as transparent as possible."

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