Insurance companies are finally banned from punishing loyal customers with higher renewal costs, the financial watchdog announced today.
The Financial Conduct Authority (FCA) said it was cracking down on unscrupulous companies to end the practice of offering higher offers to existing customers than new ones.
Regulators found last year that millions of customers were wrongly charged higher prices, including an additional £ 1.2 billion in 2018 alone.
Insurers must offer renewed customers a price no higher than what they would pay as a new customer.
But those regularly looking for a cheaper deal, often younger customers, might end up paying more, with discounts getting smaller and scarcer for everyone.
New rules: The British financial watchdog is taking action against insurers who offer loyal existing customers worse offers than new customers
Sarah Coles, Hargreaves Lansdown Personal Financial Analyst, said, “Regular changers pay the price. That’s what we’ve seen regularly now from the FCA, where efforts to protect the most vulnerable customers cost more savvy consumers more. ‘
Ian Hughes, executive director of data consultancy Consumer Intelligence, said: ‘The most savvy consumers who shop every year will see prices soar and discounts and offers disappear.
“However, the industry has the opportunity to take advantage of all of these changes and do something that is good for brands, good for the industry, and good for consumers.”
The FCA acknowledged that the changes are likely to end unsustainably cheap deals for some customers.
But officials said total consumers will save £ 4.2 billion over 10 years.
“This is a turning point for insurance and we are delighted that the FCA is taking steps to protect customers,” said Louise O’Shea, chief executive officer of Confused.com.
Last year regulators found that millions of customers were wrongly charged higher prices, including an additional £ 1.2 billion in 2018 alone.
The new rules will come into effect from January 1st next year and their effects will be reviewed in 2024.
Many, but not all, insurance companies increase prices for existing customers each year when they renew, known as price walking.
The FCA has pointed out an example where a new home insurance customer typically pays £ 130 for annual coverage. But for the same policy that has stayed with the same insurer for five years, for example, that annual premium rises to £ 238.
The FCA said, “This means that consumers will have to shop and switch every year to avoid paying higher prices for their loyalty.
‘It also distorts the way the market works for everyone. Many companies offer lower prices to attract new customers.
“They also use sophisticated processes to get the best deals for customers who they believe 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 the auto-renewal of their policy, and that insurers will need to do more to review how they are delivering fair value to their customers.
Insurers also need to send data to the FCA so that the regulator can monitor the market more effectively.
Sheldon Mills, FCA General Manager, Consumer and Competition, said: ‘These measures will put an end to the very high prices paid by many loyal customers.
“Consumers can still benefit from shopping or negotiating with their current provider – but no additional fees will be charged when they renew just because they are already a customer.
“We’re making the insurance market work better for millions of people. We will watch closely how the market performs in the future and ensure that companies continue to provide 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 to work closely with the FCA to ensure they are effectively delivered.
“While the FCA recognizes that its interventions could result in price increases for consumers who shop regularly, these remedial measures should ensure that all customers get fair results in competitive insurance markets.”
She added, “It is important that the new rules apply across the insurance market, including price comparison websites and insurance brokers, with a consistent level of supervision and oversight by the FCA to ensure good customer results.
“As the FCA said, insurers are not making excessive profits and, as they are now emphasizing, it is likely that companies will no longer be able to offer unsustainable deals to some customers.”
Rodney Bonnard, UK Insurance Manager 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 in place.
“There may well be some product consolidation immediately after the transition, but over time, innovation will be critical to competitive advantage.”
Gareth Shaw, Head of Money at Which? Said, “For far too long, insurance companies have used sharp pricing tactics to lure customers in before they are hit with staggering price hikes and exorbitant premiums. So it is right that the measures are finally implemented to put an end to these unfair practices. “
Citizens Advice previously filed a “super complaint” with the competition and market authorities about the fidelity penalty paid in the mobile, broadband, home insurance, mortgage and savings markets.
Bowel Pain: Many, but not all, insurance companies increase prices for existing customers every year when they renew
Matthew Upton, Director of Policy at Citizens Advice, said, “For us and these loyal customers, this solution cannot come soon enough.”
Meanwhile, Owen Morris, General Manager of Personal Lines at Aviva UK General Insurance said: ‘We welcome the FCA’s intention to provide consumers with greater clarity and consistency on general insurance pricing and we are committed to doing so with the FCA and the industry to work together on these new rules. ‘
He added, “Aviva has already taken steps to address some of these issues by limiting price gaps between new and renewed customers and testing new products. These changes will add further consistency in eliminating price gaps.”
General retail insurance products are a major market in the UK with sales of £ 24 billion in 2017. In 2018, more than 45 million new home and car insurance policies were taken out, according to the FCA.
Higher insurance costs on the way?
The FCA acknowledged that the changes they are making to “loyalty penalties” are likely to put an end to unsustainably cheap deals for some customers.
With This is Money highlighted last year, banning this practice means insurers will no longer be able to reserve the best deals for new customers, while at the same time existing policyholders who do not churn if they renew will be billed more.
While the rule change is good news for the majority of policyholders who choose to stick with their existing provider, it will likely punish those who took the trouble to look around.
Last year, Consumer Intelligence insurance experts said, “One thing is absolute – premiums will go up.
‘In the current model, insurers offer sharply reduced new business prices to attract new customers, but only make a profit in the second or third year of the policy. Of course, prices need to be balanced to support the sustainability of the industry. ‘
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