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Insurers impose 'tax on being poor' through monthly price hike, says Which?

Insurers penalise the hard-up

insurers
Some insurers charged consumers an almost 40% annual premium, according to Which? research. (Westend61 via Getty Images)

Consumer group Which? has called on the UK's financial regulator to clamp down on insurance companies hiking the price of monthly payments, referring to the levy as a "tax on being poor."

Which? asked 39 car insurers and 34 home insurers what annual percentage rates (APRs) were being applied to monthly payments and where there was more than one rate, what made the difference.

Some car owners are charged APRs of nearly 40% when paying for insurance monthly, while people who stump up the yearly sum get off lightly.

Home insurance is only slightly better, Which? found, with some companies imposing charges of almost 35% APR on monthly instalments.

Car insurers: the best deals and worst offenders

For car insurers, the highest rate was 1st Central’s 39.11%. It charges between 5% and 39.11%, giving each customer a personal interest rate after a credit risk assessment.

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The average rate across 27 providers that charge interest and disclosed their rate was 23.37%.

Read more: When will interest rates fall and what should you do?

Only two (5%) of the car insurers asked — NFU Mutual and Hiscox (HSX.L) — said they do not charge interest on monthly repayments.

Some 10 firms refused to disclose this information when asked, including AXA (CS.PA), Budget, Dial Direct, Esure, First Alternative, Geoffrey Insurance, Nutshell, Sheilas’ Wheels, Swiftcover and Zenith.

Markerstudy, which provides insurance under the Bradford & Bingley, Budget, Dial Direct, Zenith, Geoffrey Insurance and Nutshell brands, told Which? it performs “regular assessments (at least annual) on the rates of credit we offer our customers” and it is “confident that we have the appropriate governance, oversight and controls in place to ensure our premium finance provides fair value and delivers appropriate customer outcomes.”

A spokesperson for Axa said: “We believe that using representative APR provides an inaccurate comparison of the interest rates insurance companies charge to customers for paying monthly. This is because firms calculate representative APR in different ways.”

Home insurers: who's leading the pack?

For home insurance, the highest rate was charged by Co-op Insurance — where customers pay between 31.31% to 34.75% APR on monthly payments. The average among providers that charged a rate and disclosed it was 23%.

Read more: The UK’s most expensive streets ranked

Co-op Insurance told Which? that it “welcomes” the findings, noting the “importance” of “giving customers the option to spread the cost of their insurance over the course of a year.”

After benchmarking its rates, the company said: “We are looking to reduce them; we will update our customers on this as soon as we can.”

Fifteen (44%) of the home insurance providers surveyed said they do not charge interest — Bank of Scotland, Halifax, Hiscox, HSBC (HSBA.L), Lloyds Bank (LLOY.L), MBNA, M&S Bank (MKS.L), Nationwide Building Society (NBS.L), NFU Mutual, Sagic, Sainsbury’s Bank (SBRY.L), Santander (BNC.L), TSB, Urban Jungle and Yorkshire Building Society.

Seven providers refused to disclose their rates, including AXA, Bradford & Bingley, Budget, Dial Direct, Esure, Sheilas’ Wheels and Swiftcover.

The higher rates charged by insurers to pay for cover monthly resemble interest applicable for credit card borrowing.

A call for better regulation

The research follows previous Which? investigations that found that those who pay for cover in monthly instalments can end up paying hundreds of pounds more over the course of a year due to interest on payments.

Quotes called in in November for a real 18-year-old driver on First Central’s Premier Online policy (costing £3,388 to buy upfront), came with an interest rate of 36.32% APR to pay monthly — adding a further £504.

“We understand it is important to customers that we keep the price of insurance as low as possible — and benchmarking tells us that we are competitive for both annual premiums and for those that wish to pay monthly through a credit arrangement," First Central told Which?.

Read more: Best savings accounts that offer above inflation rates

In January of this year, the average credit card rate was 34.8% with the majority of cards charging up to 25%, compared to the average car insurance premium finance rate of 23% and the highest rate of 39%. The risk to insurers, however, is much lower because the credit being offered is directly linked to the sale of the insurance policy and non-payment by customers can lead to the cancellation of the policy.

The consumer group is now calling on the Financial Conduct Authority (FCA) to get a grip on firms charging high amounts of interest on monthly repayments, which can penalise customers who are less able to pay for their cover in a one-off lump sum.

“The regulator has been clear — paying for insurance monthly is a tax on being poor and it’s shocking to see providers still trying to justify the practice," said Rocio Concha, Which? director of policy and advocacy. "Given many firms’ interest rates don’t seem to reflect the modest risk they’re taking on, customers paying monthly are being charged disproportionately more than those paying annually."

“It is now time for the FCA to step up and to get tough with firms that take advantage of customers who can least afford it.”

Watch: What items in your shopping basket count for inflation?

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