The latest report from the Automobile Association in the UK reveals the extent to which car insurance providers charge for monthly repayments of car insurance premiums. Datamonitor's Financial Services Consumer Insight research suggests that this tactic may not be sustainable in the long term, given consumers' growing value awareness and the financial difficulties in which many find themselves.

 

Datamonitor's flagship consumer survey, which assesses consumer attitudes and behaviors throughout the economic downturn, has found that around 47% of UK consumers aged 18 and above have seen a worsening of their household financial situation. With the news that some car insurers are charging an annual percentage rate (APR) of around 25% for monthly direct debit payments of premiums, it is no surprise that customers are increasingly looking for ways to reduce their premiums. With approximately 13.2 million customers paying for their car insurance monthly, this is a significant revenue stream for some market players.

Currently the UK personal motor market is hardening (showing an increase in premium rates in line with worsening profitability) and as a result consumers have become increasingly price savvy. Findings from Datamonitor's Financial Services Consumer Insight survey, which was conducted in May 2009, indicate that 38% of respondents said that they were looking at ways to reduce their insurance premiums, while 34% said that they use price comparison websites in order to find the cheapest premiums. With this in mind, insurers risk losing customers by having higher APRs than their competitors, and the market may see greater competition in monthly premium interest charges. Age Concern and Saga have already advertised the fact that they do not impose any extra charges for monthly payments.

Arguments in favor of charging a monthly interest rate for premium payment are that it improves the affordability of policies when customers are not cash-rich and that, from the insurer's point of view, it is effectively a loan on the cost of the annual policy and helps to reduce customer attrition (since customers are often charged for cancelling a policy). However, going forward it is possible that car insurance providers may offer more competitive monthly APRs due to increasing customer price sensitivity.