This piece is by Sarah Vaughan, Director, Angelica Solutions
The FCA’s market study into premium finance may be well intentioned, but as with many regulatory interventions, the risk of unintended consequences looms large. In seeking to enhance fairness and transparency, we must be careful not to reduce accessibility and choice particularly, for the most financially vulnerable customers.
Premium finance has long served as a tool for affordability, allowing consumers to spread the cost of their insurance. Yet the FCA’s focus on remuneration structures and APR levels, while understandable, may not fully reflect the reality of consumer behaviour or the operational trade offs insurers must make to support instalment-based payments.
There’s no denying that for many insurers the margins on finance products have become an important lever in maintaining profitability. But to view the APR or finance charge in isolation is to miss a key point, customers paying monthly often carry higher risk. The margin from the finance element isn’t pure surplus, it’s frequently part of a broader, more complex risk based pricing model.
To their credit the FCA acknowledges this nuance noting that insurers who earn more on premium finance typically have lower margins on the core policy. But that kind of internal cross subsidy is now under the spotlight. Whether it’s deemed fair by the regulator or by consumers remains to be seen.
If regulators do move to clamp down on high APRs, insurers will need to find profit elsewhere. That’s no simple task in today’s market. With pricing rules already restricting how payment method can be factored into insurance pricing, it will be difficult to reflect the higher costs associated with certain customer behaviours. The likely outcome? The cross subsidy won’t disappear; it will just reappear somewhere else in the population.
And as we’ve warned before, a simpler, more cautious way for firms to respond, is by tightening the criteria for offering any instalments at all. That risks reducing access for the very customers who most need flexibility in how they pay.
Most consumers don’t care who earns what from premium finance. The disclosures required under the Insurance Distribution Directive (IDD) already mean customers are presented with the total cost and deposit. If that cost is competitive, they’re satisfied. The internal revenue share between insurer and third-party finance provider is rarely their concern.
A more pressing concern is the influence of preferred payment method on quoted premiums, a subtle but significant issue. Our own checks on aggregator sites show that selecting “monthly” as a preferred option can lead to both higher and lower premiums being quoted, before any finance charges are applied. That’s not about APR. That’s about pricing algorithms using “how you prefer to pay” as a proxy for risk and buying behaviour, and this feeding into lifetime value calculations.
Since the introduction of the GIPP regulation, insurers are no longer allowed to price directly based on payment method, but many still use this kind of preference data during quote journeys. It’s a grey area that needs clarity. If the FCA is looking for a “quick win,” this would be a good place to start by taking a clear stance on pricing that changes based on payment preference alone.
What we’re seeing is the same underlying challenge that surfaced with GIPP, regulatory pressure rightly aiming to increase fairness, but in doing so, squeezing out pricing tools that, when used well, reflect genuine risk and enable inclusion.
The danger lies in unintended consequences. If we want to move towards a fairer and more transparent market, the solution isn’t to eliminate complexity, but to manage it better. That means greater clarity around cost structures, a more nuanced view of risk, and an industry that works with the regulator, not just around them.
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