Car and home insurance firms are charging high levels of interest for customers who do not pay their policies upfront, a Which? study found.
The average annual percentage rate (APR) of interest charged to customers was 22.33% for car insurers and 19.83% for home insurance policyholders.
Those two rates are similar to a typical credit card rate of 25% but do not relate to the level of risk taken on by a firm, as a customer’s policy can be cancelled as soon as a payment is missed.
Co-op Insurance was the worst offender for this out of the insurers that took part in the survey, with a 29.89% APR for both home and car insurance. This rate was followed by The AA, Hastings Direct, Insure Pink and People’s Choice, which all offered 26.9% for both types of policy.
The AA and Hastings mirrored that price for their home insurance policies, too.
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The next-loftiest rates of 26.6% and 26.5% for car insurance were from The Green Insurer and Santander.
To cover your home, 1st Central charged 25%, however not all of the 49 car insurers and 48 home insurers disclosed their rates.
Extra £161 if you go monthly
Of the firms that did not share their rates, following a mystery shopping exercise, iGo4 quoted a staggering 45.1% APR, which could bump up the annual price of the policy by £161 if paying monthly instead of yearly.
The other car insurers that opted out of the price survey were Swinton, which quoted 33.8% APR, and Dial Direct, Nutshell and Zenith, which charged 29.9%.
The issue is a long-standing problem for drivers, and in April, a crackdown by the Financial Conduct Authority (FCA) was launched on hefty APR rates for monthly payments.
Matt Brewis, the head of insurance at the FCA, labelled it as a “tax on being poor”.
Further, home insurance prices are a fifth more expensive than they were a year ago, according to the Association of British Insurers’ (ABI’s) research. This is worsened by the extortionate increase in payments that customers have to pay each month, Which? said.
In defence of insurance premiums costing more for customers if they can only pay for the policy monthly, the ABI said money generated from upfront payments can be reinvested into businesses, whereas monthly premiums cannot.
However, the members of the ABI – with Consumer Duty rules to adhere to – agreed to five Premium Finance Principles to improve the deal customers get, which are transparency, affordability, fair value, proportionality, governance and accountability.
Among the values included publicly sharing the annual cost of an insurance policy compared to the monthly fee. Also, the brokers, third-party providers and insurance providers agreed to take into account the fact that the excessive monthly premiums hit those who can least afford it the worst.
However, many providers are continuing to charge above the APR included in credit card deals.
‘Customers are paying over the odds’
Rocio Concha, Which?’s director of policy and advocacy said: “Many customers who pay for home or car insurance monthly don’t do so out of choice, but financial necessity. That these same customers can end up paying over the odds compared to those who pay for cover annually is blatantly unfair.
“This is not the first time Which? has sounded the alarm over eye-watering levels of interest, yet excessively high rates persist.”
Concha added: “Car and home insurance policies aren’t nice-to-haves, but essential for motorists and homeowners. It’s high time for the FCA to take meaningful action against firms that continue to charge high rates and end this injustice.”
