By ANGHARAD CARRICK
Customers who pay for car and home insurance monthly rather than yearly are paying higher premiums, despite firms being told to curb the practice.
City watchdog the Financial Conduct Authority found that some firms are making a margin of more than 60 per cent on so-called 'premium finance' arrangements.
This is where customers are advanced the money for an annual premium, and then pay in monthly instalments.
Analysis found that the margins on monthly insurance payments ranged between 14 and 62 per cent across insurers, intermediary lenders, intermediary brokers and specialist premium finance providers between 2018 and 2023.
Around 48 per cent of motor and home insurance was paid monthly in 2023.
The FCA requires insurance premiums charged to customers using premium finance to be at the same level as those paying yearly, unless there is an 'objective and reasonable basis' for the change.
Higher premiums: The FCA says pay monthly insurance customers are being charged more
Some insurers argue that the choice of payment method is correlated with the risk for those paying monthly, however.
The FCA said: 'Where firms charge for premium finance, revenues appear to materially exceed costs for some providers.
'Whereas the profit margin earned on a core insurance policy may be relatively low, we see margins on premium finance that are somewhat higher.
'Different business models will have different ways of recovering costs.
'In some cases, they recover all costs through the insurance product itself, or recoup returns on lower margin insurance product through higher APRs [annual percentage rates].'
As yet, the FCA will not introduce a cap or any other measures to encourage insurers to equalise premiums.
Hannah Gurga, director general of the ABI said: 'Having the option to pay for insurance in monthly instalments can provide flexibility for those who need to manage their budgets.
'Offering this service does involve costs for insurers, and firms also have to keep cover in place for a period of time if a payment is delayed or missed.
'Our Premium Finance Principles, which we published last year, outline that any charges should be fair, transparent and reflective of the costs that the insurer faces.
'We'll continue to work with our members on this matter and engage with the FCA's review.'
The FCA also said that soaring car insurance premiums were 'outside of firms' control' rather than being driven by insurer profits.
It found that the cost of motor claims has been primarily driven by higher prices for cars, parts, labour and energy.
The cost of hire vehicles, and the number and cost of theft claims, and uninsured drivers have also contributed to the rise.
The average cost of car insurance premiums dropped 7 per cent in the first three months of 2025 compared to a year earlier, from £635 to £539, according to figures from the Association of British Insurers.
However, premiums remain higher than two years ago when the average annual policy cost was £478.
The FCA found that referral fees from credit hire firms and claims management companies had also pushed prices higher and contributed to slower processing.
While the Government's motor taskforce, launched in 2024 to tackle the rising cost of car insurance, may help drive down premiums, the regulator said it would not prevent these kind of cost increases.
The FCA also said that insurers across all sectors still needed to handle claims more efficiently.
It said it had 'uncovered evidence of poor claims handling practices', particularly in the home and travel sector.
This included just under a third of storm damage claims resulting in a payment, and what the FCA describes as 'insufficient management information'.
Sarah Pritchard, deputy chief executive of the FCA said: 'Insurance provides peace of mind but people must be confident they can get a fair deal and be treated right when the worst happens.'