Change of policy

In previous years, it was always the intermediary that charged ‘policy fees’ to supplement the commission paid by insurers. The direct market made a point of advertising this fact as a differentiator between its products and the products offered by intermediaries.

However,there has been a change over the past two years with policy fees being charged both in the intermediary and direct markets.

Nearly all direct insurers now apply policy fees for any adjustments made by the policyholder or requesting a duplicate certificate of motor insurance. The most noticeable change though is the addition of a cancellation fee now being charged to cover the insurer’s set up costs.

The following tables analyse a selection of the direct and major intermediary market and the policy fees that are charged.

In general, most direct insurers and intermediaries do not include an additional set up or arrangement fee at the inception or the renewal of the policy, however, there are a few providers who do make this type of charge and this could be as much as £20.

The direct market has over the past two years started to make administration charges for adjustments that are made by policyholders.

This fee is also added to any normal additional premium that would be charged for the change in the annual premium. The charges range from no charge all to a maximum of £25.

If the policyholder requires a duplicate certificate – previously most direct insurers would have not made a charge to provide this service. Again the charges now can range from no charges being made to a maximum of £25.

The most significant change in the direct market is the addition of cancellation fees, created to cover policy set-up costs.

Cancellation fees can include a charge made by the insurer for the cancellation of the policy and/or a charge for the claw-back of the commission paid to intermediary.

Some other insurers do not specify the exact fee. This is because their cancellation terms are based on a pro-rata refund plus one month’s additional charge.

Therefore, the charge applicable is obviously based on the annual premium – this has been noted as a potentially “unlimited” charge.

As the motor insurance market is still incredibly competitive, insurers have as yet, been unable to increase rates to a level that would return a profitable book of business. The introduction of policy fees is a way of obtaining extra income throughout the policy year.

However, is introducing policy

fees a fair and valid way of raising extra premium that would not be available at the inception or renewal of the policy?

The FSA may well have a different view as to whether the fees currently being charged are fair and relevant, bearing in mind the Office of Fair Trading action against unfair bank charges.

Defaqto believes that it is reasonable to charge policy fees to cover any costs involved in the arranging and servicing of a policy.

However, the amounts currently being charged within the motor market vary considerably and are not necessarily fair in comparison to the work involved.

It is quite likely that the FSA will look at whether the amounts being charged are fair within the Treating Customers Fairly (TCF) environment, and that some level of uniformity may be imposed.