Astronomic!

A major MoS survey finds car and home insurers charge up to 20% EXTRA just for the privilege of paying in instalments. No wonder they call it a premium

AMAJOR survey into the pricing of home and motor insurance by The Mail on Sunday shows that millions of customers are being hit with double-digit interest charges for the privilege of paying premiums monthly rather than annually.

This is despite the fact that interest rates remain at a rock bottom 0.25 per cent. Indeed, most insurance companies have increased their cost of credit in recent years despite benign interest rates since March 2009.

Brands that have pushed up interest charges include Churchill, Endsleigh, Esure, LV=, More Than, the Post Office, Privilege and Saga.

Earlier this year, the Post Office increased the interest rate it imposes on buyers of its home and car cover who pay monthly – from 10.7 per cent to 11.5 per cent fixed interest. It defended the increase on the grounds that the setting up of monthly payments involves more paperwork and there is a risk of payment default.

Despite the increase, the Post Office’s interest charges are not the highest. Far from it. Other insurers are charging close to 20 per cent.

The hefty cost of this credit has been condemned by one former insurance executive. He told The Mail on Sunday that consumers are ‘paying through the nose for the privilege’ and that some insurers and brokers are ‘clearly having a laugh’.

He said there was no reason why people should pay extra for paying by instalment. ‘Why shouldn’t consumers pay monthly given it is monthly cover for 12 months?’ he asked.

James Daley, of consumer championing website Fairer Finance, says he has never understood why insurers thought it was acceptable to charge customers for paying in instalments.

He adds: ‘When you look at the system in detail it is all the more bizarre. As a monthly payer, you are effectively borrowing the money – sometimes from the insurer, sometimes from a specialist lender – to pay your premium for the whole year in advance. To make matters worse, the interest rates are often unacceptably high.

‘For younger drivers, who face high premiums, and have no choice but to spread the cost, interest can add hundreds of pounds extra to their car insurance bill.’

He believes people should be allowed to insure on a monthly basis – pay as you go insurance. He says the penalising of monthly payers is another example of the insurance industry ‘designing products for their own convenience rather than shaping them around the customer’.

For young drivers the interest can be hundreds of pounds

THE SURVEY

The Mail on Sunday sent questionnaires to all the leading providers of motor and home cover. On payment of premiums by monthly instalment, we asked five simple questions:

What is the fixed rate of interest applied to those who renew car or home insurance on a monthly basis?

When was the current rate of interest introduced?

What was the previous rate of interest?

Do you have any plans in the pipeline to reduce the fixed interest rate?

Do you think the rate of interest is fair to customers given the record low cost of borrowing?

NINETEEN insurance brands responded to the survey although not all chose to answer all the questions (see box below).

The interest rates applied by insurers range from zero (NFU Mutual) through to nearly 20 per cent (Endsleigh). Eight brands have raised their charges since base rate fell to 0.5 per cent in March 2009.

Only Zurich – which owns the Endsleigh brand – said it was cutting interest charges. The interest rate levied on own branded monthly motor policies, it said, would be dropped from 15 per cent to nine per cent this year.

NFU Mutual started scrapping its interest charges last year as customers renewed policies.

It said: ‘Not everyone can or wants to pay their insurance premiums in one lump sum and we do not think our customers should be penalised for that.’

In terms of possible reductions, Endsleigh said it was looking to ‘review’ rates over the coming months. Zurich said interest rates on home cover were ‘currently under review as part of a proposition refresh’. Others, including Aviva and Esure, said charges were constantly under review.

Direct Line Group – also embracing brands Churchill and Privilege – said it was ‘unable to discuss future pricing strategy due to competition law’. Brand More Than said its interest rate of 10 per cent was both ‘fair and favourable’.

Most insurers defended the interest charges applied to monthly premiums on cost grounds, arguing such arrangements are expensive to set up. There is also the possibility that monthly payers may default on payments. Aviva said: ‘Our interest rates allow for both the cost of borrowing and our experience of credit risk’.

A spokesperson for Direct Line Group advised that a ‘good tip for readers could be to recommend the use of a zero per cent interest credit card to pay once for the annual cover’.