There’s no denying that for many insurers, the margins on finance products have become an important lever in maintaining profitability. But to view the APR or finance charge in isolation is to miss a key point which is customers paying monthly often carry higher risk. The margin from the finance element isn’t pure surplus, it’s frequently part of a broader, more complex risk-based pricing model.
To their credit, the FCA acknowledge this nuance, noting that insurers who earn more on premium finance typically have lower margins on the core policy. But that kind of internal cross subsidy is now under the spotlight. Whether it’s deemed fair by the regulator or by consumers remains to be seen.
If regulators do move to clamp down on high APRs, insurers will need to find profit elsewhere. That’s no simple task in today’s market. With pricing rules already restricting how payment method can be factored into insurance pricing, it will be difficult to reflect the higher costs associated with certain customer behaviours. The likely outcome? The cross subsidy won’t disappear, it will just reappear somewhere else in the population.
And as we’ve warned before, a simpler, more cautious way for firms to respond, is by tightening the criteria for offering any instalments at all. That risks reducing access for the very customers who most need flexibility in how they pay.
What we’re seeing is the same underlying challenge that surfaced with GIPP, regulatory pressure rightly aiming to increase fairness, but in doing so, squeezing out pricing tools that, when used well, reflect genuine risk and enable inclusion.
The real challenge lies in the unintended consequences. If we’re serious about creating a fairer market, the answer isn’t piecemeal restrictions on pricing, but smarter oversight. That means greater clarity around cost structures, a more nuanced view of risk, and an industry that works with the regulator not just around them.