Renewal quotes for home and motor insurance customers will soon not be more expensive than they would be for new customers, in a bid to tackle loyalty penalties in the insurance sector.
Millions of home and motor insurance customers lose out if they renew repeatedly with their current providers, according to the city regulator.
In 2018, six million loyal policy holders would have saved £1.2bn had they paid the average price for their actual risk.
But soon insurers will be required to offer renewing customers a price that is no higher than they would pay as a new customer. As a result, it is also likely that firms will no longer offer unsustainably low-priced deals to some new customers.
The new rules will be in place by 1 January 2022.
Firms increasing prices on existing customers each year at renewal is called ‘priced walking’, and means customers have to shop around and switch every year to avoid paying higher prices.
According to the Financial Conduct Authority (FCA), ‘price walking’ distorts the way the market works for everyone, with many firms in turn offering below-cost prices to attract new customers.
Additionally, insurance providers will have to give consumers easier methods of cancelling automatic renewals on their policy, and supply more data to the FCA.
The financial watchdog estimated that these measures will save consumers £4.2bn over 10 years.
Sheldon Mills, executive director of consumers and competition at the FCA, said: “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.”
Gareth Shaw, head of money at consumer champion Which? added: “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.”
Price comparison sites hit
Jimmy Williams, CEO at insurer Urban Jungle, said price walking is a systemic part of the insurance industry, and welcomed the decision to bring it to an end.
“Price walking is completely systemic in the insurance industry and it is unethical in our view,” he said.
“A customer should not be enticed in with low rates, only to see them hiked up at a later date. But many firms are doing precisely that, so we welcome the FCA’s decision to ban it.”
Williams said the ban could also have a big impact on price comparison sites.
“The reason price walking happens is because price comparison websites are so important to insurers,” he continued.
“The only way to win on price comparison is to be the cheapest. It’s rational to do everything you can to be the cheapest provider at minute one, and layer on a load of hidden costs and price increases later.
“The change caused by the FCA’s decision could be profound. Price comparison websites could be heavily impacted as the amount consumers will be saving by switching is going to fall. So people might switch less often.”