Briefing: Are premium finance providers allowed to profit?

Last week’s flurry of announcements from the FCA included updates on a market investigation into claims performance, an analysis of the impact of the general insurance pricing practices (gipp) and an update on the market study underway into the premium finance market.

And, as a market sector about which the FCA has made its concerns known, the updates from the premium finance investigation were particularly interesting – if only because the regulator ruled out some of the more radical actions it might have taken.

Premium finance – a specialist form of credit sold to insurance customers to allow them to spread annual costs over instalments – is used extensively, with over 20 million adults in the UK using credit to stagger their premiums. 

This arrangement costs policyholders extra, with insurance providers charging for the provision of credit via interest, which covers the annualised cost of borrowings, alongside other costs.

Crucially, however, premium finance providers are private entities – and thus are, beyond covering their costs, also entitled to generate profit from the provision of this service. 

However, while the FCA noted that “premium finance providers incur a material level of costs so that consumers can pay monthly”, it also said “despite this, revenues materially exceed costs for some providers”. Is this necessarily a bad thing? 

Jill Hambley, managing director at Insurance Compliance Services, told Insurance Times: ”The FCA is definitely looking for the profit an insurance intermediary makes to come from its principal business activity. 

“So if an intermediary’s income from premium finance comes only as a result of the fact that it places insurance, then they’ve got to be quite careful about the ratio of those income streams to each other.

“However, I do genuinely think it’s the outliers that the FCA is mostly interested in – those companies making unseemly profits from premium finance.” 

What price intervention?

Obviously, it feels right that the regulator should step in regarding situations where vulnerable consumers are being denied access to insurance by premium finance interest rates which are so high that they preclude purchase.

However, the FCA’s investigation found that the majority (80%) of UK premium finance customers were paying under 30% annual percentage rates (APR), which it deemed acceptable in most cases.

A crucial factor in the debate generally is the access to insurance products – and, thankfully, the FCA analysis agreed that premium finance arrangements supported this on the whole.

Steve Cox, director of insurance consulting and technology at WTW, noted that this conclusion was appropriate and praised the quality of the FCA’s investigation.

He added: “If you look at the premium finance market as a whole, it supports actual consumer needs and is very convenient, with most cases falling within the bounds of fair value. 

”There are obviously some outliers and cases that require supervision, but the FCA already has enough rules and regulations in place to police those without needing to bring in extra rules.”

Indeed, while the FCA investigation will continue – with a focus on higher priced products and vulnerable customers – a single market-wide cap on APRs was ruled out and described as “not consistent” with the full range of premium finance business models. 

It also ruled out mandating that insurance be offered at 0% APR and banning commission payments.

Hambley welcomed this approach, noting that the imposition of regulations around maximum APRs could have led to unintended consequences and potential market exits, with a negative impact on access to insurance for those that rely on premium finance.

The regulator explained: “A cap may reduce the availability of premium finance and so limit access to insurance in a detrimental way.”

A sensible conclusion – and while the slightly inflammatory headline to this piece may question the approach, it is good to see the FCA accept that premium finance providers are allowed to turn a profit from their practices in return for providing access to insurance. 

Just don’t take the mick.