New rules for UK home and motor insurance mean that, from January, policyholders will no longer be penalised for their loyalty.
After years of complaints, the Financial Conduct Authority (FCA) has moved to remove barriers in the way of existing customers getting the best deals at renewal time – offers usually reserved for people taking out policies with the same insurer for the first time.
FCA expects the change to save loyal customers an estimated £4.2 billion over 10 years.
We are making the insurance market work better for millions of people.”
Sheldon Mills, FCA
The new measures address issues identified in the financial services watchdog’s September 2020 market study, which found that millions of home and motor insurance customers lose out if they renew repeatedly with their current providers.
In 2018, six million loyal policyholders would have saved £1.2bn had they paid the average price for their actual risk.
Many firms raise premiums for existing customers at renewal each year in a practice known as price walking.
This means consumers have to shop around and switch annually 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.
FCA’s new rules will stop firms price walking. Insurers will be required to offer renewing customers a price that is no higher than they would pay as a new customer.
It is likely firms will no longer offer unsustainably low-priced deals to some customers.
In addition to the new rules on pricing for home and motor insurance, the regulator is also bringing in new rules to:
- Give most consumers easier methods of cancelling the automatic renewal of their policy.
- Force insurance firms to do more to consider how they offer fair value to their customers.
- Require home and motor insurance firms to report data so that it can supervise the market more effectively.
‘We will be watching closely to see how the market develops in the future’
FCA consumers and competition executive director Sheldon Mills 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.”
The pricing, auto-renewal and data reporting remedies come into effect on January 1 2022.
FCA has also published research on how incentives affect consumers’ choices, focusing on purchases of motor and home insurance made through price comparison websites.
‘Watershed moment for insurance’
Gareth Shaw, head of money at consumer champion 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.
“It is vital that the regulator keeps a close eye on insurance firms to ensure they don’t find new ways to exploit customers and should be ready to take further action where necessary.
“Greater transparency is still needed on what factors insurance firms are using to set prices and the FCA should carry out further work looking at whether there are other practices firms should be prohibited from using.”
Comparison website welcomes the move
Confused.com chief executive Louise O’Shea said: “This is a watershed moment for insurance, and we’re very happy to see the FCA taking action to protect customers.
“These new reforms will see an end to customers being priced unfairly when it comes to renewal.
“But this doesn’t stop the need to shop around. These regulation changes simply mean that a company must offer its renewing customers the same price as if they were a new customer.
“A company’s pricing structure could still change, or a customer’s circumstances could change. And how can you know if you’re definitely getting the best price, if you don’t compare?”
Things are about to get very competitive.”
Louise O’Shea, Confused.com
Ms O’Shea added: “Ultimately, things are about to get very competitive – insurers will be competing to win new business, and so there will be a better price out there for every customer.
“You could be throwing away money by doing nothing and accepting your renewal price year-on-year.
“The FCA has also said insurers must make it easier for customers to cancel their automatic renewal, whether that’s through a click of a button or a quick and easy phone call.
“Currently, this process can be lengthy and stressful, which is off-putting and forcing people into accepting their renewal price. This will stop, and this is great news.”