Insurance companies will finally be banned from penalising loyal customers with higher renewal costs, the financial watchdog announced today.
The Financial Conduct Authority (FCA) said it is cracking down on unscrupulous firms to end the practice where existing customers are offered quotes that are higher than new ones.
Regulators found last year that millions of customers were being unfairly charged higher prices, including an extra £1.2 billion in 2018 alone.
Insurers will be required to offer renewing customers a price that is no higher than they would pay as a new customer.
But those who regularly shop around for a cheaper deal, who are often younger customers, could end up paying more, with discounts for everyone becoming smaller and more scarce.
New rules: Britain’s finance watchdog is cracking down on insurers who offer existing loyal customers worse deals than new customers
Insurance pricing shake-up: What happened today and will my premium be affected?
Loyal insurance customers renewing their home or motor policy will get the same deals as new customers under a radical pricing shake-up.
Here is a look at what the problems are in the sector and how the Financial Conduct Authority (FCA) intends to fix them:
What are the problems?
Insurers often quote higher prices for existing customers than for new ones – this is known as the loyalty penalty. The extra amount balloons year after year.
Some firms’ practices may also discourage consumers from shopping around, including making it difficult to cancel automatic renewal.
How widespread are loyalty penalties?
Ten million policies across home and motor insurance are held by people who have been with their provider for at least five years, the regulator said previously. As many as six million UK consumers could be harmed.
How big are loyalty penalties?
The regulator previously found new customers pay around £285 for motor insurance while customers who have been with their provider for more than five years pay £370.
New customers for combined buildings and contents insurance pay £165 while customers who have been with their provider for more than five years pay £287.
And new customers for contents-only insurance pay £56 while customers who have been with their provider for more than five years pay £138.
Is a customer’s age a factor?
Yes. Motor insurance customers aged under 45 remain loyal for less than two years on average. Customers aged 65-plus typically stay loyal for more than four years. The trend is similar for home insurance, the FCA said.
So what is the FCA doing?
Under the new rules, existing customers will be quoted the same price as new customers.
The new rules will also give most consumers easier methods of cancelling the automatic renewal of their policy. Home and motor insurance firms will also have to report data to the FCA so it can supervise the market more effectively.
When will the shake-up happen?
Rules on pricing and auto-renewal come into effect on January 1 2022.
What will change?
Loyal consumers who remain with their insurance provider can be sure they will not end up paying high prices simply because they have not switched.
The measures will save consumers an estimated £4.2 billion over 10 years.
So will my premium remain fixed?
Premiums may still change – for example if you have made a claim on your policy then you might be quoted a higher price.But you should not be charged more simply because you are an existing customer.
Will there be no point shopping around?
It is still worth looking for better deals elsewhere – and the new rules do not stop you negotiating with your current provider either.
Differences in firms’ products and service quality will remain a good reason to switch.
Could some regular switchers, who are often younger customers, end up worse off?
Habitual switchers might find premiums offered increase and discounts may not be as common or significant.
The FCA said: ‘We recognise that our interventions could lead to price increases for price-sensitive consumers, including younger consumers, who regularly shop around for their insurance.
‘However, current new business prices are often unsustainably low as they are designed to attract customers who will pay significantly more in the future or are subsidised by loyal customers. We do not think this provides fair value to consumers overall. Nor are these very low prices always offered to regular switchers.’
What else can influence the policies people choose?
Promotions can undermine consumers’ ability to select the best deal. Participants in an FCA experiment were particularly attracted to promotions that included a pound sign or a percent sign.
Non-cash promotions such as a free toy or cinema tickets have a small and arguably economically negligible effect on participants’ ability to select the best insurance deal and assess policy prices correctly, researchers said.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: ‘Regular switchers will pay the price. It’s something we’ve seen regularly from the FCA now, where efforts to protect the most vulnerable customers end up costing savvier consumers more.’
Ian Hughes, chief executive at data consultancy Consumer Intelligence, said: ‘The savviest consumers who shop around each year will see prices rise and discounts and offers disappear.
‘However, there is an opportunity for the industry to take advantage of all this change that is coming and do something that will be good for brands, good for the industry and good for consumers.’
The FCA admitted the changes are likely to bring an end to unsustainably low-priced deals to some customers.
But officials said that overall, consumers will save £4.2 billion over 10 years.
‘This is a watershed moment for insurance, and we’re very happy to see the FCA taking action to protect customers’, Louise O’Shea, chief executive of Confused.com, said.
Last year, regulators found that millions of customers were being unfairly charged higher prices, including an extra £1.2billion in 2018 alone.
The new rules will come into effect from January 1 next year and their impact will be reviewed in 2024.
Many, but not all, insurance companies hike prices for existing customers each year at renewal, in a practice known as price walking.
The FCA has pointed to an example in which a new customer for buildings insurance typically pays £130 for a year’s cover. But for the same policy, having stayed with the same insurer for, say, five years, that annual premium increases to £238.
The FCA said: ‘This means that consumers have to shop around and switch every year to avoid paying higher prices for being loyal.
‘It also distorts the way the market works for everyone. Many firms offer below-cost prices to attract new customers.
‘They also use sophisticated processes to target the best deals at customers who they think will not switch in the future and will therefore pay more.’
The watchdog added that the new rules will also make it easier for customers to cancel automatic renewal of their policy and require insurance providers to do more to consider how they offer fair value to their customers.
Insurers will also have to send data to the FCA so the regulator can monitor the market more effectively.
Sheldon Mills, executive director, consumers and competition at the FCA, said: ‘These measures will put an end to the very high prices paid by many loyal customers.
‘Consumers can still benefit from shopping around or negotiating with their current provider – but won’t be charged more at renewal just for being an existing customer.
‘We are making the insurance market work better for millions of people. We will be watching closely to see how the market develops in the future and to ensure firms continue to deliver fairer value to consumers.’
Representing insurance providers, Charlotte Clark, director of regulation at the Association of British Insurers, said: ‘Insurers support these reforms and will continue working closely with the FCA to ensure they are delivered effectively.
‘While the FCA recognises their interventions could lead to price increases for consumers who regularly shop around, these remedies should ensure that all customers get fair outcomes from competitive insurance markets.’
She added: ‘It is vital that the new rules are applied across the whole insurance market, including price comparison websites and insurance brokers, with a uniform level of supervision and monitoring by the FCA, to ensure good customer outcomes.
‘As the FCA has said previously, insurers do not make excessive profits and, as they now point out, it is likely that firms will no longer be able to offer unsustainably low-priced deals to some customers.’
Rodney Bonnard, UK head of insurance at EY, said: ‘In practice, we expect this to be beneficial for longer term customers but customers who switch providers regularly may pay more once the reform is implemented.
‘In the immediate aftermath of the transition, we could well see some product consolidation, however over time, innovation will be crucial to competitive advantage.’
Gareth Shaw, head of money at Which?, said: ‘For far too long, insurance companies have employed sharp pricing tactics to lure in customers before hitting them with eye-watering price hikes and exorbitant premiums, so it is right that measures will finally be introduced to help put an end to these unfair practices.’
Citizens Advice previously submitted a ‘super complaint’ to the Competition and Markets Authority about the loyalty penalty paid across the mobile, broadband, home insurance, mortgages and savings markets.
Gut wrenching: Many, but not all, insurance companies hike prices for existing customers each year at renewal
How will price comparison websites be affected?
Jimmy Williams, chief executive of insurtech company Urban Jungle, said: ‘The reason price walking happens is because price comparison websites are so important to insurers. T
‘The only way to win on price comparison is to be the cheapest. It’s rational to do everything you can to be the cheapest provider at minute one, and layer on a load of hidden costs and price increases later.
‘The change caused by the FCA’s decision could be profound.
‘Price comparison websites could be heavily impacted as the amount consumers will be saving by switching is going to fall. So people might switch less often.’
Matthew Upton, director of policy at Citizens Advice, said: ‘For us, and those loyal customers, this fix cannot come soon enough.’
Meanwhile, Owen Morris, managing director of Personal Lines at Aviva UK General Insurance said: ‘We welcome the FCA’s intent to bring greater clarity and consistency to consumers across general insurance pricing and we’re committed to working with the FCA and the industry to implement these new rules.’
He added: ‘Aviva has already taken action to tackle some of these issues through limiting price differences between new and renewing customers and testing new products, and these changes will create further consistency in removing price differences.’
Retail general insurance products represent an important market in Britain, generating £24billion in revenues in 2017, with more than 45million new home and motor insurance policies underwritten in 2018, the FCA said.
The price of loyalty penalty
In 2020, the FCA calculated the differences in prices paid by existing and new customers who have been with their provider for more than five years. Annual policy prices for a typical risk, on average:
Motor insurance: New customers pay £285, existing customers £370
Buildings insurance: New customers pay £130, existing customers pay £238
Combined buildings and contents insurance: New customers pay £165, existing customers pay £287
Contents only insurance: New customers pay £56, existing customers pay £138
Higher insurance costs on the way?
The FCA admitted that the changes they are making to ‘loyalty penalties’ are likely to bring an end to unsustainably low-priced deals to some customers.
As This is Money highlighted last year, banning this practice will mean that insurers can no longer reserve the best deals for new customers while at the same time charging more to existing policyholders who don’t switch away when they renew.
While the rule change is good news for the majority of policyholders who choose to stay with their existing provider, it is likely to penalise those who have bothered to shop around.
Last year, insurance experts at Consumer Intelligence said: ‘One thing is absolute – premiums are going to rise.
‘In the current model, insurers offer heavily discounted new business prices to acquire new customers, but don’t make profit until year two or three of the policy. So naturally, prices will need to even out to support the sustainability of the industry.’
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