The insurance ‘loyalty penalty’, where existing customers pay more for the same cover than new customers, could now be consigned to the past, under new proposals unveiled by the Financial Conduct Authority.

The central proposal from the regulator is that when a customer renews their home or motor insurance policy, they will pay no more than they would if they were to approach the same provider as a new customer, via the same sales channel. So, if the policy was renewed online, the premiums charged must be identical to those offered to new customers who purchase via the online channel.

Firms can still increase the renewal price to consumers over time, but any such increase must reflect changes in customers’ risk. This renewal price must be no higher than the equivalent new business price.

The FCA’s market study identified the following harms:

  • A significant focus on attracting new customers with low headline premiums, while simultaneously increasing margins for existing customers
  • Higher prices for customers who do not switch or re-negotiate their renewal quote
  • Pricing practices that are complex and opaque and which do not make clear the true lifetime cost of policies
  • Discouraging customers from shopping around at renewal stage

The FCA estimates that the proposals will save consumers £3.7 billion over the next 10 years. Consumer body Which? says that, on average, existing customers pay 20% more than new customers, and that this rises to 75% when we look at customers who have been with their insurer for more than 15 years. The FCA says that 10 million people have home and motor insurance policies that have been in force for more than five years.

Additional proposals announced at the same time will require insurers to clearly explain at point-of-sale and at renewal stage whether auto-renewal is a feature of the policy in question. They must provide consumers with a range of accessible and easy options to stop their policy from auto-renewing and communicate these options to consumers at point-of-sale and at renewal.

The consultation on the regulator’s proposals ends on January 25 2021.

Christopher Woolard, who was Interim Chief Executive of the FCA at the time of the announcement, 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.”

Gareth Shaw, Head of Money at Which?, said:

“The regulator is rightly proposing action to stop insurance firms from exploiting their loyal customers with sharp pricing practices. Our research has found that existing insurance customers are often punished with vastly overpriced premiums when little has changed in the service they receive.

“The FCA must move swiftly to introduce these changes and closely monitor insurance firms to ensure they do right by their loyal customers and show that it is ready to take strong action against insurers who game the system.

“Insurers need to be more transparent about the factors that they use to set prices and the regulator needs to carry out further work looking at what factors firms should be prohibited from using.”

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