Are insurer 0% instalments sustainable?
06 August 2019
06 August 2019
The reality of compliance rules applying to loan providers.
Insurers are constantly looking for ways to enhance their commercial offering and grow sales, at a time when underwriting margins are increasingly being squeezed and customers are wanting broader cover and flexible payment options. One popular example is 0% finance, offered by some insurers to acquire new customers and allowing them to pay for cover through interest free monthly instalments. But are all 0% schemes compliant?
At BIBA this year, two frequently asked questions were, “How are insurers coping with the increased regulation accompanying instalment credit?” and “Is this type of interest free credit agreement subject to compliance rules?” The reality is any credit offering charging interest for monthly instalments are covered, and while certain 0% credit agreements aren’t regulated, many are, depending on how they are set up.
The situation has created two discrete camps, those who are aware of their regulatory obligations with 0% finance deals and those who have not reviewed their current journey or offering and are unsure.
Those insurers facing the new affordability requirements have to put robust measures in place to meet the standards required by consumer credit (CONC) regulations. Some manage the complexity of delivering the new compliance rules and their associated costs well. The larger insurers, with scale and volume of business, are arguably more able to meet these costs, but this is not so easy for mid-sized and smaller players. All insurers will be considering whether any incremental spend and additional expense is necessary?
Partnering a specialist premium finance supplier, is a potentially effective and efficient option to meeting the Financial Conduct Authority’s (FCA) requirements, whilst continuing to provide customers with a financed payment option. As a credit provider, premium finance companies carry the regulatory burden taking the responsibility away from the insurer, enabling them to focus on their core skills; like underwriting, and saving them time, money and valuable resources. In addition, it can release the associated balance sheet funding requirement.
Regulatory requirements have increased in recent months. Last year, the FCA published clear guidance on new creditworthiness and affordability rules to address concerns that consumers are getting access to credit they could not afford to repay given existing commitments and indebtedness, risking creating financial distress. This was linked to wider concerns about the high levels of consumer debt. In particular, the FCA wanted to clarify:
- the distinction between affordability and credit risk
- the criteria for deciding the proportionality of assessments
- the role of income and expenditure information
- their own expectations of firms’ policies and procedures
As a premium finance supplier, Premium Credit were engaged in early discussions with the FCA during their consultation, seeking to ensure their final rules were proportionate for premium finance, and were able to meet the regulatory requirements for our insurer and broker partners quickly. We evolved our approach to affordability assessments in line with the proposed new rules, ensuring partners saw minimal disruption to their customer journeys.
In feeding back to the FCA about the impact of its proposed approaches to assessing affordability, we were able to highlight that premium finance is highly valued, as it offers a convenient and competitively priced finance option for customers, and should be freely accessible from compliant providers.
Our early engagement enabled us to invest in our systems developments and make changes to ensure we deployed a compliant and efficient payment process for our partners. In addition, we have included compliance with the new Anti-Money Laundering (AML) laws, particularly relating to sole traders and beneficial owners. Although general insurers and general insurance brokers aren’t subject to the FCA’s AML rules and Money Laundering Regulations, both still require systems and controls to prevent financial crime; they are still subject to the Proceeds of Crime Act 2002.
We have been ready to conduct these necessary affordability checks to comply with the new rules from the day they were introduced. Our digital approach:
- helps to avoid delay and unnecessary confusion in the sales process and getting the credit agreement in place
- aims to reduce the amount of extra calls to customer service teams
- accesses external data, including credit reference data, reducing the need for capturing additional information
- is seamlessly added to the insurer’s or broker’s existing processes
With our real-time technology, integrating into software house and bespoke platforms, providing customers with an instant decision on their credit application during the customer journey, we are confident customers are being provided access to the right payment options – another industry first.
In conclusion, Insurers offering instalment credit, including 0% finance, for monthly premium payments may face significant costs to meet the new compliance rules relating to credit, distracting them from their core underwriting skillset. We are working with a number of partners to review their process and offering against the new compliance regulation. Partnering with the right, progressive premium finance provider to meet regulatory requirements is mutually beneficial for the insurer and their customers.
Information regarding premium finance options for insurers can be found at: www.premiumcredit.com
About Premium Credit Limited
Premium Credit is the No.1 insurance premium finance innovator in the UK and Ireland and the only provider accredited by BIBA. We also provide the finance to pay annual fees such as accountancy and school fees. We support over 3000 intermediaries in our chosen markets and help over 2.1 million customers, processing more than 24 million Direct Debits annually and achieve net advances of £3.3 billion.
This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.