Have you fallen victim to the so-called ‘loyalty premium’ in the insurance market?
It appears that loyal insurance customers are regularly ripped off for their failure to shop around at renewal time each year.
In the latest interim report of its market study, the Financial Conduct Authority (FCA) looked at pricing practices for home and motor insurance.
It found that competition is not working well in these insurance markets, setting our concerns about how pricing results in consumers who fail to switch insurer or negotiate with their provider paying high prices.
The FCA estimates that around 6 million insurance policyholders are a victim to this loyalty penalty, costing approximately £1.2 billion each year.
All types of customers are affected by the loyalty premium, with 1 in 3 estimated to be potentially vulnerable.
“This market is not working well for all consumers. While a large number of people shop around, many loyal customers are not getting a good deal. We believe this affects around 6 million consumers.
“We have set out a package of potential remedies to ensure these markets are truly competitive and address the problems we have uncovered. We expect the industry to work with us as we do so.”Christopher Woolard, Executive Director of Strategy and Competition at the FCA
One of the findings in this interim report was that insurers often sell insurance policies at a discount for new customers, then increase premiums when customers renew. Those customers less likely to switch insurance providers are specifically targeted with increases.
They also found that longstanding insurance customers pay more, on average, but even some customers who switch insurers pay higher prices for their cover.
According to the FCA’s consumer research, one in three customers who paid high insurance premiums demonstrated at least one characteristic of vulnerability. These characteristics include having lower financial capability.
People who pay higher insurance premiums are less likely to understand insurance or the impact that renewing has on their premium.
Most insurance firms, when setting their prices, include their expectations of whether a customer will switch provider or pay an increased price. But this is not made clear to the customer.
To deter existing customers to switch to a better deal, insurers engage in a range of practices to raise barriers to switching.
To address these issues, the FCA is carrying out several activities. They believe they have already improved transparency on renewal for general insurance policies, delivering significant cost savings for customers as a result.
Firms regulated by the FCA will need to improve their oversight of pricing practices, delivering the required changes introduced by other recent policy changes.
The FCA is thinking about tackling high premiums for consumers by banning or restricting practices like raising prices for consumers who renew year-on-year. Alternatively, they could require firms to move customers to cheaper equivalent deals automatically.
Another possible change could restrict the way firms use automatic renewal, which would stop practices that could discourage switching.
The FCA wants to make firms be clear and transparent in their dealings with consumers. This could mean improvements to the way firms communicate with their customers.
The FCA is thinking about whether firms should publish information showing the price differentials between their customers.
In the longer-term, the FCA could force widespread adoption of technological developments to harness the benefits of innovation.
The FCA is planning to publish its final report, along with consultation on proposed remedies, in the first quarter of next year.
Until then, insurance customers should continue to shop around to get the best deal and avoid the loyalty premium.