Members of the Association of British Insurers (ABI) have committed to new steps to help manage the amount that people paying monthly for their motor insurance are charged.

The premium finance principles cover transparency, affordability, fair value, proportionality and accountability.

Recent research from Which? indicated that the rates being charged by some insurers to pay for monthly cover resemble the interest applicable for credit card borrowing.

Charges should be made completely clear to consumers and be reasonable, relative to the cost to the insurer, the ABI said.

The ABI will publish a report by summer 2025 on the impact of the principles.

The premium finance principles are:

1. Transparency – when setting out any cost for paying by monthly instalments, insurers should provide a clear comparison of the total cost of paying annually and the total cost of paying monthly. Insurers should also publish up-to-date, clear information about their common or average premium finance charges.

2. Affordability – when deciding on their premium finance offering to customers, insurers should have regard to the fact that many consumers cannot afford to pay for their insurance up front, in one lump sum and so charges for paying by monthly instalments can fall hardest on those who can least afford it.

3. Fair value – insurers must ensure that costs associated with monthly instalments represent fair value.

4. Proportionality – charges should be reasonable, relative to the costs of providing premium finance for monthly payments. Insurers should also consider charges relative to comparable and accessible alternative payment options, such as a credit card.

5. Governance and accountability – insurers must regularly review the cost to customers of premium finance. They should ensure the right level of senior management accountability.

Mervyn Skeet, director, head of general insurance policy at the ABI said: “The principles announced today are one of a raft of actions we are taking to tackle the cost of motor insurance, which we know is putting pressure on households, especially those on lower incomes. We are doing all that we can within our reach as a trade body for insurers and hope that other organisations involved with premium finance follow our lead.”

Rocio Concha, Which? director of policy and advocacy, said: “Car insurance is a legal requirement for motorists, yet many people who can’t afford to pay for their annual premiums in one go are being hit with eye-watering levels of interest on monthly payments of up to nearly 40% which can add on hundreds of pounds a year.

“While it’s good to see the insurance industry finally recognising that this is a huge problem, waiting another year for the ABI to publish its findings when insurers should already be doing this is not good enough.”