Bosses from major insurers have told MPs that customers opting to pay in monthly instalments rather than a lump sum upfront are being charged fairly for their cover.
Appearing before the Treasury Committee, the bosses highlighted the admin costs and credit risks to firms when customers pay monthly for their cover.
Concerns have been raised by consumer group Which? and others that some people are paying significantly more to split their insurance costs monthly.
Jason Storah, CEO, UK general insurance at Aviva, told the hearing: “We think that we charge a fair amount and just to bring it to life, on a £500 motor policy, a customer that is paying monthly will pay about £3 a month in the financing.”
Mr Storah told MPs the insurer is not making any real money on the financing of pay-monthly products.
Asked if he was confident his motor finance charges are reasonable, Alistair Hargreaves, CEO, UK insurance at Admiral Group, said: “Yes, so our motor finance charges similarly are at the lower end of the range… they compare favourably to other sources of finance.
“In terms of when a consumer buys insurance, most of our customers and most customers for example in motor and home go on price comparison. And for most of the price comparison sites if they select to pay monthly they’re looking at a monthly payment, they include the instalment charge as well as the underlying premium.
“And they, consumers, typically choose one of the cheapest three providers.
“So in addition to looking at the cost, we’re also keen to be competitive. We’ve been very successful by being very competitive for consumers and getting to those top three slots in order that we can serve more customers.”
Mr Hargreaves said: “We look at fair value and when we look at annual customers and monthly payers the profitability on both groups of customers is very similar.
“So we look at the overall package to make sure that what customers are paying is fair.”
Jon Walker, CEO, Axa Commercial, said: “I have a similar position to Mr Hargreaves and Mr Storah on behalf of Axa.
“We believe offering an instalment option is a service that is good for customers.”
He said: “Relatively speaking, earnings from instalments represent a pretty small percentage of our overall earnings.
“There are additional costs that are incurred around the administration of providing instalment options, the reporting of it. There’s also an element of risk the insurer takes.
“So if there is a period when a customer hasn’t made their monthly payment they are still insured.”
Asked how many weeks they would keep their insurance for, Mr Walker said: “It would depend. Typically, a small number of weeks if there was a late payment.
“And obviously there’s also a cost to insurers as well in terms of if a client pays upfront then that is money that can be invested and generate investment, income that doesn’t exist on an instalment option. So there are real costs to insurers in the industry in providing instalments. But we do think it’s a valuable product.”
He later added: “Proportionately, we don’t make more money from customers that pay by instalments versus pay upfront.”
Asked if not having a lump sum available to pay annually would give a customer a higher risk profile in the first place, attracting a higher overall cost, Mr Hargreaves said: “In terms of how we assess risk, we use all of the information that a customer provides and 90% of our customers come from comparison sites. So what we’re trying to do is we’re trying to estimate the claims cost for that customer and price them for that claims cost as competitively as possible.
“If we’re not competitive, we won’t be top on the price comparison and we won’t win the customer. So that’s how the process works.”
Mr Hargreaves later said: “How the customer answers the questions will feed through to the price, so we use that information to determine the price.
“But it’s within our interests to try and price for the claims risk as competitively as we can because it’s a hugely transparent market. So that’s really what we’re doing.
“And then when we’re looking at the profitability, and we analyse the data in all sorts of different ways, annual versus monthly what we see is the overall profitability taking everything into account is level. The customers on our portfolio who pay monthly, we’re not making more profit out of them than the annual profits, when we take everything into account.”
Mr Storah said: “We look at over 100 risk factors when determining the premium and monthly versus annual pay is one of those factors. But it’s one of 100 and so it has a place but it’s relative to a whole load of other factors. The weighting changes depending on the other factors. It’s almost like an equaliser on an old stereo system.”
Mr Storah added: “It’s a balanced view of all of those risk factors, not an over-indexing on one or another.”
Mr Walker said: “There are a plethora of risk factors that are taken into consideration. This is one of them. So, does it have a role to play? Yes it does but it’s in the context of multiple risk factors.”
