New rules banning the 'loyalty penalty for insurance customers could save car and homeowners £4.2 billion over the next ten years.
The UK's financial watchdog, the Financial Conduct Authority (FCA), announced a shake-up of the home and motor insurance industries to target so-called 'price walking.
In a report published in September 2020, the FCA found that 6 million loyal insurance customers were being over-charged for their level of risk because their premiums were arbitrarily increased when they renewed their policies- earning insurers an extra £1.2 billion per year.
Based on the 2018 survey, which formed the basis of the report, the cost to individual loyal policyholders works out at £200 per person every year.
Meanwhile, the FCA said, insurers routinely offer below-cost policies to new customers in an attempt to lure them into switching while using 'sophisticated' data analysis to concentrate their efforts on the people who are least likely to change provider in future.
The new rules will ban insurers from raising premiums on renewal unless there is a legitimate reason to do so, such as a change in personal risk level or recent claims on a customer's account.
Sheldon Mills, Executive Director, Consumers and Competition at the FCA, commented on the new rules:
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.
As well as the ban on price-walking, the FCA's new rules will require insurers to make it clear to customers how to cancel automatic policy renewals.
Companies will also need to share data with the FCA enabling the watchdog to monitor their practices more carefully.
The new rules, which are set to come into effect on 1st January 2022, are expected to put an end to rock-bottom entry pricing for new customers.
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.
As the FCA has said previously, insurers do not make excessive profits and, as they now point out, it is likely that firms will no longer be able to offer unsustainably low-priced deals to some customers.
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