Briefing: Are regulations on affordability pulling in opposite directions?

By Yiannis Kotoulas

Those paying attention to the regulator’s movements over the past few weeks may have noticed the FCA flexing its muscles. 

Back in September last year, I wrote that the industry’s regulator had placed guaranteed asset protection (gap) insurance firmly in its crosshairs after a period of information gathering left it unhappy with the product’s fair value to consumers. 

And after initially agreeing to suspend sales of gap insurance with 80% of the market last month (9 February 2024), the regulator told all remaining providers of the product to pause sales this week (4 March 2024). 

The FCA has come good on its promise to become a more assertive regulator for the insurance industry, but – as is ever the case with regulation – some in the market believe that more stringent rules around ensuring value and affordability for consumers are creating unintended consequences. 

During a panel entitled Insuring difficult risks at last week’s (27 February 2024) ABI Conference, Sabre chief executive Geoff Carter made the point that new rules concerning affordability were pulling in opposite directions somewhat. 

He explained: ”At the same time as we have the FCA saying insurance must be affordable, the other half of the FCA is saying ’here are all the the regulations around providing premium finance through affordability checks and reporting’.

“That makes it increasingly expensive to provide premium finance to the people who actually need it.” 

Unintended consequences

Motor insurers like Sabre have been no strangers to increased costs over the past 18 months or so – and it isn’t hard to see how some firms may decide to further streamline costs by halting the provision of premium finance all together. 

Premium finance, by its very nature, promotes accessibility to insurance by allowing consumers to spread the lump sum of premiums across regular payments. 

In its latest Insurance Index, published in May 2023, premium finance provider Premium Credit noted that 70% of surveyed consumers were using some form of credit to pay for one or more of their insurance policies, with 44% noting they had borrowed more to ease the financial squeeze caused by the cost of living crisis.

Speaking to Insurance Times after the conference, Carter explained: ”The FCA is trying to do two laudable things at the same time.

“It is trying to make sure that there are formal affordability checks around credit worthiness for people being offered a premium finance policy or arrangement, while also raising concerns around the affordability and availability of motor insurance to people who are less affluent.

“There’s a tension there. For others in the market, they might just decide that [providing premium finance] is too much like hard work.”

Carter is right to call the FCA’s efforts at improving the premium credit market laudable – it is absolutely not a good look for the insurance sector for vulnerable consumers to be charged exorbitant fees for the privilege of paying for insurance.

However, he is also right that a tension exists – for all of the regulator’s concern around affordability, increased requirements around providing an affordable option to customers may, in the end, end up creating more problems than solutions.

Finding a solution

Regulation is always complex and unintended consequences are exactly that – unintended. 

And for all the tension that exists between calls for affordability and increased costs in providing that affordability, the premium finance sector has welcomed increased controls that ensure vulnerable customers aren’t left out in the cold. 

In a statement to Insurance Times, Premium Credit noted: ”We welcome regulation that ensures all customers are treated fairly and have access to the essential insurance products they need.

”From creditworthiness checks that consider the customer’s specific circumstances to Consumer Duty and the associated Fair Value Assessments that compare price, distribution and service value in target markets, regulation adds value and ensures the product is offered correctly and meets customer needs.” 

The premium finance sector is one to watch – while it undoubtedly provides affordability to many customers, the costs of new regulation mean that insurance providers may soon have to consider whether affordability is affordable.