Fair By Design – Written Evidence (CIM0015)

Written evidence to the House of Lords Financial Services Regulation Committee

Inquiry into the regulation of the consumer insurance market

About Fair By Design

Fair By Design is dedicated to reshaping essential services such as energy, credit and insurance so that they do not cost more for people in poverty. This is known as the poverty premium: the extra cost that low-income households pay for the same essential services, simply because they cannot afford to pay upfront or cannot access the best deals. We work with regulators, Government, Parliament and industry to eliminate it.

We would be glad to provide further data or detail, and to facilitate a session between the Committee and our Lived Experience Panel, whose members include people who pay these costs directly. We consent to the evidence submitted here being made public. For further information please contact:

Laura Aznar Herranz, Public Affairs Manager at Fair By Design, via [REDACTED]

Summary and scope of this submission

(1) We are responding principally to Question 1(a), which asks whether there are other types of insurance where consumers face challenges similar to those in home and travel insurance. Our evidence is also relevant to Question 2 (the impact of the Consumer Duty) and Question 4 (groups facing challenges in accessing suitable insurance).

(2) This submission focuses primarily on premium finance, and on motor insurance as the clearest example: a charge that falls hardest on the consumers least able to avoid it, because motor insurance is legally required and, for many low-income households, driving is not a genuine choice. Our research also points to other areas of the insurance market that would benefit from the Committee’s scrutiny, which we touch on below.

Q1.a) Are there any other types of insurance where consumers are facing similar challenges?

(3) Premium finance is the charge consumers pay to spread the cost of an insurance premium over monthly instalments rather than paying once a year. We focus on motor insurance because it is the clearest example of the problem. Motor insurance is a legal requirement, and for many low-income households driving is not a genuine choice. The people most likely to pay monthly, and therefore pay more, are the least able to afford the annual lump sum. This is a poverty premium attached to a product that the consumer cannot avoid. The same mechanism applies to home insurance, where paying monthly adds around 8% to the cost (FCA, 2026). 53% of low-income households with contents insurance pay this way, incurring around £9 a year (University of Bristol and Fair By Design, 2026). However, our research shows there are a number of areas in the insurance market that would benefit from further scrutiny from this committee. As the table below shows, the highest average poverty premium incurred by households is in single item insurance of appliances – an area not covered in the scope of this inquiry:

Source: University of Bristol and Fair By Design (2026), Paying More for Less: The Poverty Premium in 2026.

• Motor insurance is a cost that low-income households cannot avoid

(4) Driving without at least third-party motor insurance is a criminal offence under the Road Traffic Act 1988. Unlike home or travel cover, this is not a product a household can choose to go without. The only lawful way to drive is to hold and pay for a policy.

(5) For many low-income households, driving itself is not optional either. The Government's own Motor Insurance Taskforce acknowledged that the cost of cover affects household budgets and, in some cases, limits personal mobility and life chances (DfT and HM Treasury, 2025). Research has found that some workers, such as care workers, are effectively required to run a car to do their jobs at all (University of Bristol and Fair By Design, 2026). For these households, the practical choice is not between paying annually and paying monthly. It is between paying monthly, at a higher cost, or being unable to work or meet caring responsibilities.

• Premium finance falls hardest on those least able to afford it

(6) Paying monthly rather than annually pushes up the cost of motor insurance by around 10% (FCA, 2026). According to our own research, on average, this adds £71 a year for low-income households who pay this way, rising to £181 a year for drivers aged 17 to 19 (University of Bristol and Fair By Design, 2026). Around 45% of low-income motor policyholders pay for their cover monthly (University of Bristol and Fair By Design, 2026). Insurance is the single largest component of the overall poverty premium, contributing more than energy or food (University of Bristol and Fair By Design, 2026).

(7) Crucially, the people who pay monthly are disproportionately those who can least afford to. The FCA's own Market Study found that paying in instalments is far more common among households already under financial strain:

Source: FCA (2026), How and Why Consumers Use Premium Finance.

(8) This Study also confirmed that paying monthly is a necessity, not a choice, and that 60% of motor customers paid by instalments because they couldn't afford the annual sum (FCA, 2026).

(9) This pattern holds in further research. For example, single parents have over three times the odds of paying monthly for motor insurance compared with single adults without children, and Black policyholders are also significantly more likely than White policyholders to pay this way (University of Bristol and Fair By Design, 2026). The same is also true for renters, people in financial difficulty and several other minority ethnic groups, all of whom are over-represented among households in or near poverty.

• The extra cost is difficult to justify on risk grounds

(10) The standard defence of high charges in credit markets is credit risk: the chance the lender is not repaid. Premium finance does not fit that picture. If a consumer stops paying, the insurer can cancel the underlying policy, so the lender's exposure is limited. The FCA's own analysis confirms that bad debt and default rates in premium finance are low, largely because of this cancellation backstop (FCA, 2026).

(11) Despite this lower risk, prices remain high. The FCA found that most premium finance consumers pay headline APRs of 20% to 30%, with one in five paying more than 30% (FCA, 2026). Its scrutiny under the Consumer Duty has brought APRs down: across the firms it reviewed, average APRs fell by 4.1 percentage points between 2022 and 2026, and by around 7 percentage points among the firms it identified as at highest risk of not providing fair value (FCA, 2026). That prices moved this much under regulatory pressure suggests the earlier levels were not closely tied to cost. The distributional effect is clear in the FCA's own data. Consumers with vulnerability characteristics, such as having previously been declined a financial product, are less likely to hold an interest-free (0% APR) payment plan for motor insurance than more financially resilient customers (8% compared with 15%). The consumers most in need of lower-cost financing are the least likely to be offered it.

Q2) What impact has the Financial Conduct Authority’s (FCA) Consumer Duty had on the consumer insurance market?

(12) The Consumer Duty has had a real effect. The FCA published the final report of its Premium Finance Market Study in February 2026, and credited the Duty's fair value expectations with bringing APRs down and saving consumers an estimated £157 million a year (FCA, 2026). However, we question whether the FCA has gone far enough with its interpretation of fair value under the FCA’s Consumer Duty. Firms must demonstrate that the price paid by consumers represents fair value relative to the benefit received. The FCA’s profitability analysis, published as part of the Market Study, found that insurers earned a weighted average margin of 53% on premium finance between 2018 and 2023, intermediary lenders 36%, intermediary brokers 38% and Specialist Premium Finance Providers (SPFPs) 24%. The FCA concluded that “despite the decline in premium finance margins over time, they continued to appear high compared to costs for most cohorts except SPFPs” and that in some instances premium finance margins are materially higher than the cost‑to‑serve. This suggests that more regulatory scrutiny is required and that competition is not working in this market as consumers face limited choice, limited price transparency, and have limited ability to act on the information easily available.

(13) Despite this, the FCA decided against any sector-wide intervention, ruling out an APR cap, a mandated 0% APR or a ban on commissions, and choosing instead to monitor the market and act against individual firms through the Consumer Duty (FCA, 2026). The report acknowledges that high prices persist. This leaves a market in which the regulator has confirmed the problem, declined structural action, and is relying on firm-by-firm supervision to close a gap that affects millions of low-income consumers who cannot leave the product.

(14) Price comparison websites do not resolve this. The FCA's view is that they aid transparency by ranking quotes with the cost of premium finance included in the overall annual price (FCA, 2026). However, because finance charges are usually a small part of the headline quote, consumers compare on the total price rather than on the cost of the financing itself, so the competitive pressure that drives down annual premiums does not translate into pressure on premium finance APRs. The result is that even as average motor premiums have fallen recently, the penalty for paying monthly remains built into the market for those who cannot pay annually.

Q4) Are there any groups of consumers that face challenges in accessing suitable insurance?

(15) The cost of cover is increasingly pushing households out of insurance markets entirely, and this is not confined to the lowest incomes. The FCA's own Financial Lives data found that 22% of all UK adults, around 11.8 million people, cancelled an insurance or protection policy, reduced their level of cover, or chose not to buy a policy in the year to January 2024, to save money or because they could not afford the premiums (FCA, 2024). The FCA also found that affordability pressures have driven a fall in the proportion of younger adults holding motor and contents insurance specifically (FCA, 2024).

(16) Among low-income households, the picture is more acute. In the past year, 3% reported cancelling an insurance policy they still needed, and 17% of those aged 25 to 34 said they had cancelled, reduced or chosen not to buy cover to save money (University of Bristol and Fair By Design, 2026). Home contents insurance, which falls directly within this inquiry's scope, is among the products most often given up on affordability grounds: 19% of low-income households go without it because they cannot afford it, alongside 21% for income protection (University of Bristol and Fair By Design, 2026). For contents cover this means a fifth of low-income households carry no protection against theft, fire or flood, not because they have judged they do not need it, but because the cost is out of reach.

(17) For a compulsory product like motor insurance, being priced out has direct and even further-reaching consequences, both for people's ability to work and for the wider problem of uninsured driving.

What we ask the Committee to consider

(18) We ask the Committee to press the following points with the FCA and Government:

• Scenario analysis on reduced APRs. The FCA should use the cost and margin data it has already gathered to model the effect on consumers, providers and access of materially reducing premium finance APRs. The absence of this analysis is a gap in the regulatory evidence base.
• Disaggregated disclosure of charges. The FCA should require clear, disaggregated disclosure of premium finance commissions and charges across the distribution chain, so that consumers, firms and regulators can judge whether pricing reflects genuine value.
• Continued fair value reporting. The FCA should keep publishing updates on how the Consumer Duty is securing fair value in premium finance until it is confident that all insurers and distributors are meeting that standard.
• Recognise the compulsory nature of the cover. Because motor insurance is a legal requirement that many low-income households cannot avoid, the bar for demonstrating fair value on its financing should be correspondingly high. We would welcome the Committee recognising premium finance on essential, compulsory insurance as a distinct consumer protection concern.

Sources:

• Financial Conduct Authority (2026). Premium Finance Market Study, Final Report (MS24/2) and How and Why Consumers Use Premium Finance (MS24/2.2).
• Financial Conduct Authority (2024). Financial Lives Survey.
• Evans, J. and Davies, S. (2026). Paying More for Less: the Poverty Premium in 2026. Personal Finance Research Centre, University of Bristol. Commissioned by Fair By Design.
• Department for Transport and HM Treasury (December 2025). Motor Insurance Taskforce: Final Report and Actions.
• Road Traffic Act 1988, sections on compulsory third-party motor insurance.

24 June 2026