Industry group Financial Counselling Australia and the Financial Rights Legal Centre have put insurers on notice after discovering customers are being kept in the dark on their payment options.
For many, paying premiums annually or by instalments can have big financial consequences because paying monthly or quarterly costs more.
This effectively amounts to a "poverty premium", FCA disaster recovery co-ordinator Louise Hayes warned on Wednesday.
"People who are already stretched should not be charged more because they cannot pay a full year of insurance in one hit," she said.
According to a report released by the General Insurance Code Governance Committee, an independent body that enforces the industry code of practice, insurance customers should expect to get clear information on their options.
It found customers using instalments pay an extra seven to 11 per cent on top of the annual payment.
Of the 20 insurers the report covers, 12 charged customers on instalment plans more.
Of those 12, only four clearly disclosed the cost difference and potential savings for yearly payments.
Six insurers did not clearly explain the cost differences, and of those, two maintained that their current approaches were sufficient while four said they were making changes.
The report noted that in some cases, when the time came to renew a policy, notices to customers used vague wording, such as annual payments "may" be cheaper or instalment fees "may" apply.
"For the insurance market to work properly, consumers need appropriate information to make an informed decision," legal centre policy development principal Drew MacRae said.
"The practices highlighted are unfair and financially penalise the people who need a break the most."
Both bodies said it was time for insurers to clearly disclose costs and payment options at renewal time and remove instalment "penalties".
The industry also needs to make sure, particularly during the current cost-of-living crisis, that customers in hardship aren't locked into higher-cost arrangements.
The bodies also warned that if insurers are unwilling to adopt sufficiently transparent pricing practices, they will consider further action.
The most common types of insurance are home and contents, motor vehicle and private health.
According to Canstar, the average annual home and contents insurance premium was $2,795 in 2025.
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