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28 May 2021

FCA to ban car and home insurance 'loyalty penalty' in January: will you save money?

Which? explains how the new rules will impact your premiums

The Financial Conduct Authority (FCA) is bringing an end to the practice of car and home insurers charging loyal customers more than new customers.

'Price walking' - commonly known as the 'loyalty penalty' - is a pricing practice where existing customers are increasingly charged more, the longer they stay with the same insurer.

Following a consultation launched in September 2020, the FCA has confirmed this unfair practice will be banned from 1 January 2022 - saving customers an estimated £4.2bn over 10 years.

Here, Which? explains how the rules are changing and how it could impact how you shop for insurance in the future.

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How are car and home insurance pricing rules changing?

Insurers will have to offer existing customers wanting to renew, a price that is no higher than they would pay as a new customer coming through the same 'sales channel'.

The 'sales channel' is just how you reached your insurer, which could be through their website, over the phone, through a comparison site or via a broker. These can all have an effect on the premium you pay and will continue to do so.

So, for example, if you're renewing over the phone, you'll be offered the same price as a new customer switching to that insurer by phone. But this might be a higher premium than a new (or existing) customer taking out a policy online.

As well as the new rules on pricing practices for home and motor insurance, the FCA is also bringing in new rules to make it easier to cancel the automatic renewal of their policy, which should make it easier to shop around.

When will the new rules come into force?

The pricing and auto-renewal changes will come into effect on 1 January 2022.

Gareth Shaw, Head of Money at 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.'

Will everyone save money under the new rules?

The FCA anticipates that it is likely that insurers will no longer offer unsustainably low-priced deals to new customers.

So if you are in the habit of switching each year to get a better deal you might notice a jump in cost the next time you switch your car or home insurance policy.

However, the FCA estimates that in the long-term this move will improve the market and these measures will save insurance customers £4.2bn over 10 years.

Why are the rules changing?

Back in 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 on average 20% more than new customers. In the extremes, those that had stayed with their insurer for 15-20 years were paying a staggering 75% more than those who'd recently switched.

In separate research, the FCA found that in 2018, roughly six million policyholders were paying £1.2bn more than they needed to thanks to the loyalty penalty and a whole host of other complex and opaque pricing practices.

Will you need to shop around anymore?

The ban will take effect next year - so until then, the usual rules of shopping around for the best deal apply.

But even after the new rules come into force it's still worth shopping around toget the best price available each year.

After the ban is imposed, your insurer won't be able to use your loyalty against you. Nonetheless, you're still going to see your premiums change from year to year, so it will always be worth checking if more competitive deals are available.

We also recommend challenging renewal premiums if they seem out of line with what rival insurers will offer you to switch.

But price shouldn't be your only consideration. Our car and home insurance Which? Recommended Provider tables compare insurers on levels of cover and satisfaction of customers that have claimed.

Will you still be able to haggle?

The way the market currently operates means renewing customers' prices are often inflated because they haven't switched, so haggling can often prove fruitful as our research has found.

The ban will prevent renewing customers from being in this position, and hopefully, make haggling a little less necessary.

However, the FCA does not intend to stop firms being able to negotiate their final price with customers that dispute the quote. This means haggling may still be worth it if you're unhappy with the price offered.

How did the insurance industry react?

Charlotte Clark, Director of Regulation at the Association of British Insurers, said: 'Insurers support these reforms and will continue working closely with the FCA to ensure they are delivered effectively.

'While the FCA recognises their interventions could lead to price increases for consumers who regularly shop around, these remedies should ensure that all customers get fair outcomes from competitive insurance markets.

'It is vital that the new rules are applied across the whole insurance market, including price comparison websites and insurance brokers, with a uniform level of supervision and monitoring by the FCA, to ensure good customer outcomes.