The Financial Conduct Authority is to review soaring insurance premiums for home and motor insurance and the practice in some markets of paying for insurance in instalments.

The regulator says it will carry out a “package of work in the insurance market” amid concerns about rising prices and instalment payment practices.

The competition market study will review particularly whether people who borrow to pay for motor and home insurance are receiving fair deals. 

The study will investigate at so-called ‘premium finance’ which allows people to pay for insurance in instalments.

The watchdog said that with the average yearly rate on the amount of money borrowed ranging between 20%-30%, the FCA is concerned that premium finance may not be providing “fair value.”

Premium finance often means consumers pay much more for insurance, albeit allowing them to spread payments rather than paying a one-off premium.

More than 20m people are estimated to pay for their insurance in this way and FCA research shows that 79% of adults in financial difficulty have used this system.

As part of its market study, the FCA will review whether the products represent fair value, how well customers are made aware of their financing options, the role of commission and potential barriers to effective competition in the motor and home premium finance market.

Graeme Reynolds, director of competition at the FCA, said:  “People rely on premium finance to spread their insurance costs by paying in smaller monthly payments. We want to ensure that competition works well and make it easier for consumers to find the best deals.”

The Government recently announced a taskforce, which includes the FCA, to identify actions that may stabilise or reduce motor insurance premiums, while maintaining appropriate levels of cover.

The FCA says it will analyse the causes of increased costs in motor insurance and will look closely at claims costs, reviewing claims handling arrangements and factors impacting different types of claim.

The regulator will also analyse the impact of rising insurance prices on different customer groups, such as younger and older drivers and those from ethnic minority backgrounds or on lower incomes.

The ABI has welcomed the initiative.

Hannah Gurga, ABI director general, said: "We understand how crucial it can be for consumers to have the option to pay monthly, so they can manage their insurance costs. That’s why we launched our Premium Finance Principles earlier this year, which outline that any charges should be fair, transparent and reflective of the cost to the insurer. We will continue to work with our members on this matter and look forward to learning more from the FCA."