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22 Sep 2020

FCA to ban the car and home insurance 'loyalty penalty': how much will you save?

Insurance price practices to be overhauled in 2021

The Financial Conduct Authority (FCA) is setting out to ban a pricing practice which is costing insurance customers hundreds of millions of pounds each year.

'Price walking' - commonly known as the 'loyalty penalty' - is a pricing practice where customers are increasingly charged more the longer they stay with the same insurer. On 22 September, the FCA proposed to ban this, which it estimates will save customers £3.7bn over 10 years.

The industry watchdog is also instructing insurers to make it easier for customers to cancel automatic renewal arrangements - making it easier to switch insurer. These rules should come into effect in late 2021.

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The problem with car and home insurance

The loyalty penalty has been a long-suffered frustration for many car and home insurance customers.

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 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.

Last year, the FCA identified that in 2018, roughly six million policyholders were paying £1.2bn more than they needed to thanks to the loyalty penalty and a swathe of other complex and opaque pricing practices.

Its analysis revealed as well as tying your premium to the length of time you'd been with them, insurers consider a range of other factors when offering you a price. These include how likely they estimate you are to switch the following year, or how high a price they think you'll tolerate. Because of this, even some customers who switch pay inflated prices.

When will the ban come into force?

Last year, the regulator proposed a number of potential measures to help make pricing fairer and more transparent, which today's report firms up.

The FCA is now asking for views on its proposed recommendations by 25 January 2021 with new rules expected to come into force in the second half of the year.

Responding to the FCA's proposed actions, 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.'

How will banning the loyalty penalty affect my insurance?

The ban will mean that when you renew, your insurer won't be able to charge you a higher price than they would a new customer coming through the same sales channel.

Some customers who regularly switch and haggle may see slight increases in the premiums they're offered. This is because the way the current market works, insurers offer new customers discounts that renewing customers effectively pay for.

Overall, the ban is expected to save customers £3.7bn in the next 10 years.

Is it still worth shopping around?

Yes. We're not likely to see the ban take effect until late next year - so until then, the usual rules apply.

To get the best price available, you'll need to shop around each year, and we recommend challenging renewal premiums if they seem out of line with what rival insurers will offer you to switch.

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.

Price isn't the only consideration, of course. Our car and home insurance Which? Recommended Provider tables compare insurers on levels of cover and satisfaction of customers that have claimed.

Will I get the same deal as all other customers like me?

Not exactly. Insurers will have to offer the same quote to new and renewing customers that have reached them through the same 'sales channel'. This means how you reached your insurer, that is, through their website, over the phone, through a comparison site or 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.

Will it still be worth haggling?

The short answer is yes. We always recommend customers regularly haggle as our research has found that those who do so often get the best prices.

Part of the reason for this is that, in the way the market currently operates, renewing customers' starting prices are often inflated simply because they haven't switched. The ban will prevent this, 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.