Insurance firms will be banned from charging existing policyholders more than new customers under rules to protect them from the so-called ‘loyalty premium’.
City watchdog the Financial Conduct Authority today said the new rules will mean that renewal quotes for home and motor insurance consumers will not be more expensive than the ones offered to new customers.
It comes after an investigation in 2018 found 6million loyal policy holders would have saved £1.2billion had they paid the average price for their actual risk.
Many firms increase prices for existing customers each year at renewal – this is known as price walking.
This means that consumers have to shop around and switch every year to avoid paying higher prices for being loyal.
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.
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The 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 said these measures will save consumers £4.2billion over 10 years, by removing the loyalty penalty and making the market work better.
In addition to the new rules on pricing for home and motor insurance, the FCA is also bringing in new rules to give most consumers easier methods of cancelling the automatic renewal of their policy.
Sheldon Mills, executive director, at the FCA said despite the measures, customer should still be proactive when the contract is up.
‘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 1 January 2022.
Matthew Upton, Director of Policy at Citizens Advice, said the measures will encourage firms to 'do the right thing'.
“It’s more than two years since we submitted our super-complaint on the £4 billion-a-year loyalty penalty paid by consumers across the mortgages, savings, mobile, insurance and broadband markets," he said.
"We’re pleased to see the FCA setting the bar so high in stamping out this systematic scam, and we now need to see similar action in the other markets.
“No longer will loyal insurance customers face price-walking - gradual year-on-year increases - that can leave them paying way over the odds. Instead firms will have to do the right thing and offer them the same deal as a new customer.
“For us, and those loyal customers, this fix cannot come soon enough.”
