Car and home insurance 'loyalty penalty' could be banned

Around six million motor and home insurance policyholders are paying as much as £1.2bn more than they need to because of the 'loyalty penalty'. Following an in-depth investigation, the regulator is considering banning this practice.

The Financial Conduct Authority (FCA) has uncovered a series of unfair pricing practices in the insurance market, where loyal customers are being hit with higher premiums.

Here we explain what the investigation found and how the rules on car and home insurance might change as a result.

What's wrong with car and home insurance pricing?

The FCA confirmed what many insurance customers have experienced for years: loyal customers get a worse deal compared with those who switch or haggle.

In November 2018, we surveyed more than 5,000 people with a home insurance policy, asking how long they had been with their insurer and how much they paid.

We found existing customers were paying an average of 20% more than new customers, with average premiums of £240. In the most extreme cases, customers that had stayed with their insurer for 15 to 20 years were paying a staggering 75% more than those who had recently switched.

The FCA found a similar trend, with renewing customers paying 20% more for home insurance.

In addition, the FCA looked into the car insurance market. It found that renewed motor policies were 11% more expensive than new ones.

The FCA report revealed those who were vulnerable were most likely to pay inflated premiums, with one in three customers who paid high premiums classified as vulnerable. As an example, those who earned less than £30,000 paid higher margins on their combined home and contents insurance than higher-earners.

The FCA is worried that people who pay more are less likely to understand the impact of automatically renewing their policies, and that firms are putting up a range of barriers to switching.

How car and home insurance could change

The FCA has set out several steps it's currently considering for improving the industry, including:

Banning the loyalty penalty:the FCA wants to tackle the high premiums some consumers face, especially the practice of raising prices for those who renew each year.

Cracking down on auto-renewals: the FCA is keen to stop practices that discourage switching, including the use of automatic renewals, which can catch busy people out.

Publishing the insurance price gap: the FCA wants insurers to improve the way they communicate with customers, which may include requiring companies to clearly state the different prices their customers pay.

Use more 'Open Finance': the FCA encourages firms to harness innovations that could help customers get a better deal, such as 'Open Finance'. Like Open Banking, this data-sharing initiative could unlock insurance information and allow customers to shop around more easily.

The FCA intends to publish its final findings and recommendations between January and March 2020.

• Which? members can read our reviews of the best and worst home insurance or the best and worst car insurance providers.

'Sharp pricing practices need to end'

Which? welcomed the suggestions by the FCA, and called for the regulator to take decisive action.

Which? head of money content, Gareth Shaw, said: 'It is right that the regulator is proposing solutions to stop these sharp pricing practices.

'Our research has found existing insurance customers can be left paying hundreds of pounds more than new customers as a result of complex and opaque pricing systems.

'The regulator must now ensure these proposals are brought in swiftly, and that it is ready to take strong action against firms that continue to rip off consumers simply for staying with their providers.'

How to get a better deal on your insurance

You don't need to wait for the FCA to clean up the industry to get a better deal on your home or motor insurance.

If you've been with the same provider for more than a year, it's likely you could get a better deal by switching.

You should do your research and compare quotes when you receive your renewal notice.

Under new rules introduced in April 2017, renewal notices must include both last year's and this year's premium, to make it clear how much more you'll be charged. But insurers don't have to tell you what other customers are paying for the same policy.

It might be worth seeking a quote for the same policy as a new customer, and seeing what the price difference is. Quote in hand, phone your existing insurer and haggle for a reduction. The FCA found 60% of customers who tried to negotiate achieved lower prices for the same level of cover.

But if your existing insurer doesn't budge, you're likely to be better off switching.

• Find out more using our guides on how to find cheap car insurance or how to find cheap home insurance.