Fair By Design and SMF launch report on insurance poverty premiums

Fair By Design and the Social Market Foundation (SMF) published a report on insurance poverty premiums, launched at an event in spring 2023, which found that paying monthly for car insurance can cost £160 more a year than paying upfront¹. The research also found that over half of people in poverty were finding it difficult to pay for their insurance during the cost-of-living crisis, leading some to give up insurance as they prioritised food and energy bills¹.

The extra cost arises from premium finance, the loan and interest that insurance providers charge when a customer pays monthly rather than in one payment¹. Fair By Design describes this as a poverty premium, and the report sets out how the additional cost affects take-up of cover among people on low incomes¹. One person cited in the report, Zahada, said she had to pay monthly for her daughter's car insurance because the family did not have the full amount upfront, which cost them an extra 10%, or around £200¹.

The Financial Conduct Authority (FCA) has signalled it will tackle premium finance. Matthew Brewis, the FCA's Director of General Insurance, said:

Brewis also questioned why some consumers face such high rates, saying it was not "really apparent why's it's appropriate for APRs at 30% or above charged to consumers"¹. The Association of British Insurers said it agreed on the need to collaborate with the Treasury and the FCA on issues identified in the report, and the then Shadow City Minister Tulip Siddiq MP, speaking at the same launch event, said action was urgently needed, adding: "Too often it's just more expensive to be poor, which is not how we want the country to be run"¹.

Fair By Design said it is calling for political parties to make addressing the poverty premium part of their commitments, and that it wants to see a UK where everyone pays a fair price for essential services and where it does not cost more to be on a low income¹. The organisation's director, Martin Coppack, wrote the piece¹.

Why it matters for households

Paying for car insurance monthly rather than annually is common among households that cannot cover the full premium in one payment, and the report puts the extra cost at £160 a year in the case it examined¹. For households already struggling with food and energy bills, that gap can tip the decision towards going without cover altogether, the research found¹. Driving without insurance is a separate matter covered by the Motor Insurers' Bureau arrangements for uninsured and untraced drivers.

The cost of paying monthly is not the only factor in what a premium comes to. How premiums are calculated, including Insurance Premium Tax, and the structure of how insurance works in terms of premiums, excess, cover limits and exclusions, both bear on the total a household pays. The report's focus is specifically on the surcharge attached to instalment payments, which Fair By Design and the SMF treat as a poverty premium¹.

What happens next

The FCA has been engaging chief executives on premium finance, according to Brewis, and expects the prices charged for paying monthly to be proportionate to the credit risk and the cost of providing the service¹. Fair By Design said it wants political parties to commit to addressing the poverty premium in an election year¹. No further timetable for regulatory action is set out in the report¹.