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
Change in insurance prices: what happened today and will my premium be affected?
Loyal insurance customers who renew their home or car policy will receive the same offers as new customers as part of a radical price change.
Here’s a look at the issues that exist in this sector and how the Financial Conduct Authority (FCA) aims to fix them:
What are the problems?
Insurers often quote higher prices for existing customers than for new ones – this is known as a loyalty penalty. The extra amount of balloons year after year.
Some companies’ practices may also discourage consumers from shopping nearby, including the difficulty of canceling auto-renewal.
How common are loyalty penalties?
Ten million policies in home and motor vehicle insurance are taken out by people who have been with their provider for at least five years, according to the supervisory authority. Up to six million UK consumers could be harmed.
What are the loyalty penalties?
The regulator previously found that new customers pay around £ 285 for car insurance, while customers who have been with their provider for more than five years pay £ 370.
New customers for combined home and contents insurance pay £ 165, while customers who have been with their provider for more than five years pay £ 287.
And new customers for content-only coverage pay £ 56, while customers who have been with their provider for more than five years pay £ 138.
Is a Client’s Age a Factor?
Yes. Motor insurance customers under the age of 45 remain loyal for less than two years on average. Customers aged 65 and over typically remain loyal for more than four years. The trend in home insurance is similar, according to the FCA.
What does the FCA do?
According to the new rules, existing customers will be offered at the same price as new customers.
The new rules will also provide most consumers with easier ways to cancel the automatic renewal of their policy. Home and auto insurance companies are also required to report data to the FCA so that it can monitor the market more effectively.
When will the tremor take place?
Pricing and auto-renewal rules will take effect January 1, 2022.
What will change?
Loyal consumers who stay with their insurer can be sure that they won’t end up paying high prices just because they haven’t switched.
The measures will save consumers an estimated £ 4.2 billion over 10 years.
So will my premium stay fixed?
The premiums can still change. For example, if you have made a claim on your policy, you may be offered a higher rate. However, you shouldn’t be burdened any easier because you are already a customer.
Won’t it make sense to go shopping?
It’s still worth looking for better deals elsewhere – and neither are the new rules preventing you from negotiating with your current provider.
Differences in the company’s products and service quality remain a good reason to switch.
Could some regular switchers, who are often younger customers, be worse off?
Habit changers may find that the rewards on offer increase and discounts may not be as common or significant.
The FCA said, “We recognize that our interventions can result in price increases for budget conscious consumers, including younger consumers who regularly check out their insurance.
‘However, current new business prices are often not sustained low because they are intended to attract customers who will pay significantly more in the future or who will be subsidized by loyal customers. We don’t think this offers fair value to consumers overall. Also, these very low prices are not always offered to regular switchers. ‘
What else can influence people’s politics?
Promotions can undermine consumers’ ability to choose the best deal. Participants in an FCA experiment were particularly drawn to promotions that included a pound sign or a percent sign.
In-kind promotions such as a free toy or movie tickets have a small and economically negligible impact on participants’ ability to choose the best insurance contract and correctly evaluate insurance prices, according to the researchers.
How can I compare prices quickly?
This can be done in less than ten minutes via price comparison websites. You can use MoneySupermarket, GoCompare, or This is Money’s Partner Compare The Market.
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
How are price comparison websites affected?
Jimmy Williams, managing director of insurtech company Urban Jungle, said, “The reason prices are rising is because price comparison websites are so important to insurers. T.
‘The only way to win in the price comparison is the cheapest. It is sensible to do whatever it takes to be the cheapest provider the first minute and consider a ton of hidden costs and price increases later.
‘The change brought about by the FCA’s decision could be profound.
Price comparison websites could be badly affected as the amount consumers save by switching will decrease. So people may switch less often. ‘
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.
The price of the loyalty penalty
In 2020, the FCA calculated the price differences from existing and New customers who have been with their provider for more than five years. Average annual policy prices for a typical risk:
Car insurance: New customers pay £ 285 and existing customers pay £ 370
building insurance: New customers pay £ 130, existing customers pay £ 238
Combined building and content insurance: New customers pay £ 165, existing customers pay £ 287
Content only insurance: New customers pay £ 56, existing customers £ 138
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. ‘
Don’t wait: this is the quick way to save money on insurance
When it comes to auto insurance, home insurance, or any other policy, it’s always best to never just take your renewal price and shop around instead.
You can try using the deals you get to negotiate a better deal with your current provider, or you can just switch to another insurer who may offer better deals or better service to new customers.
You can easily get a quote through price comparison websites. You can try MoneySupermarket or GoCompare, or use This is Money’s Partner Compare The Market.
Some insurers do not appear on comparison sites and are worth checking out directly. The two most important are Direct Line and Aviva.
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