Bloomberg Notes Insurer’s High Interest Payment Plans

As IE pointed out recently, the FCA statement on premium rate motor leasing finance holds hard lessons for insurers too. Those who are currently enjoying charging as much as 45% interest on monthly instalment plans may well see a different take on the matter in the future, with customer compensation demanded via the regulator. It’s a risk highlighted some 18 months ago by Toby at Ignite Systems on Twitter and LinkedIn, so maybe it’s time to rethink those payment plans on car insurance?

In any event, Bloomberg agrees that some insurers will see a drop in share price as consumer pressure grows in the UK.

Here’s the word,

Admiral and Direct Line’s profit could be threatened if the Financial Conduct Authority clamps down on companies charging customers for paying auto premiums monthly, amid tightening UK car and home insurance regulation, finds Bloomberg Intelligence (BI). Premium-finance income provided £45 million in revenue for Direct Line in H1, and contributed 13.6% of Admiral’s profit before tax in 2021, notes BI.

Earnings are being challenged at UK auto and home insurers like Admiral and Direct Line by a steady increase in FCA (Financial Conduct Authority) regulation, in a market that remains highly competitive and subject to claims inflation, believes BI.

Admiral and Direct Line’s share price dipped on 9^th Jan 2024 after FCA insurance head Matt Brewis said via an interview that the regulator views premium finance – charging interest to insureds that want to pay their auto or home insurance premiums monthly rather in one lump sum – “a poor product”. He added the FCA has “talked about it enough”, hinting at potential action.

Kevin Ryan, Senior Industry Analyst – Insurance, at Bloomberg Intelligence, commented: “As regulatory pressure builds, the scope for Admiral to sell add-on benefits to its auto insurance product has steadily reduced. That includes premium finance, and at H1 the total of all non-insurance products was 18% of operating profit (22% at FY 2022). In 2021, instalment income from premium finance contributed 13.6% of profit before tax, and total ancillary income (excluding profit commission) was 33.6%. Still, the Bloomberg MODL consensus for FY 2023 places Admiral at a price/earnings ratio of 21.8, a five-year high.

“Direct Line made a £180 million H1 operating-profit loss in auto insurance following a £132 million deficit in H2 2022. Given the sharp divergence in results with larger peer Admiral, there may be issues with Direct’s IT system introduced in June 2021, making the insurer’s profitability potentially vulnerable to any suggestion the FCA might engage with it in regard to the enforcement of Consumer Duty – or any aspect of the UK’s General Insurance Pricing and Practices – rules.

“Direct Line had revenue of £45 million in H1 in instalment income for clients paying premiums monthly rather than in one lump sum, equivalent to 2.8% of insurance revenue. The potential loss of this revenue is likely less important to earnings than improving the auto underwriting result.”