Dealing with the insurance loyalty penalty

Existing insurance customers who pay more than new customers, as a result of the so-called loyalty penalty, could soon get better protection from the regulator.

The Financial Conduct Authority (FCA) has published its final report after carrying out a market study into the pricing of home and motor insurance. The FCA is worried that these markets are not working well for consumers, and they are setting out proposals to deal with these issues.

In their proposals, the FCA wants to see significant market reforms designed to enhance competition and ensure consumers will receive fair value. In doing so, the FCA hopes to increase trust in these insurance markets.

The FCA wants a customer renewing their home or motor insurance policy to pay no more than they would as a new customer using the same channel. For example, a customer renewing their insurance policy online would pay no more than a new customer buying the same type of insurance online.

There’s nothing in the proposals to restrict insurers when it comes to setting their new business prices, but the new rules would prevent firms from gradually increasing the renewal prices for consumers over time; this practice is known as ‘price walking’. Prices for existing customers could rise over time in line with increases to their risk.

These are important steps as this practice of raising prices for existing customers has been around for years. Some insurance customers shop around to get a better deal, but others lose out for being loyal.

The FCA’s market study found that insurers target price increases on the consumers who are least likely to switch to more competitive deals. Insurers were also found to use practices making it harder for customers to leave. At the same time, firms do not always offer regular switchers their lowest prices.

Back in 2018, there were an estimated 6 million policyholders who are paying high or very high margins on their insurance products. If these customers had paid the average price for their products, they would have saved a collective £1.2 billion.

The FCA is also consulting on other new measures to further boost competition and deliver fair value to all insurance customers including:

  • Product governance rules requiring firms to consider how they offer fair value toall insurance customers over the longer term.
  • Requirements on firms to report certain data sets to the FCA so that it can check the rules are being followed.
  • Making it simpler to stop automatic renewal across all general insurance products.

Christopher Woolard, Interim Chief Executive of the FCA, commented:

“We are consulting on a radical package that would ensure firms cannot charge renewing customers more than new customers in future, and put an end to the very high prices paid by some long-standing customers. The package would also ensure that firms focus on providing fair value to all their customers. We welcome feedback on the proposals.”

By implementing these new rules, the FCA plans to improve competition in the insurance market and give consumers access to lower prices. The FCA estimates that its proposals will save consumers £3.7 billion over 10 years. In terms of the timing for these new rules, they will not come into force until next year.

Huw Evans, ABI’s Director General, said:

“The ABI agrees with the FCA that the household and motor insurance markets do not work as well as they should for all customers, and we continue to support the FCA’s work to address this.

“Insurers and brokers have already begun to tackle the issue of excessive price differences between new and existing customers through an industry initiative that has seen over 8.5 million pricing interventions across home and motor insurance worth £641 million.

“It is vital that price comparison websites and insurance brokers are subject to the same level of supervision and monitoring by the FCA to ensure a balanced approach. We will consider carefully this package of proposals, so that we can engage with the FCA on the most effective measures possible. There are winners and losers in the way the market works currently with those who switch insurance provider every year often ending up with lower prices. The FCA has confirmed that insurers have not made excessive profits.”

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