Six million home and motor insurance policy holders are overpaying a combined £1.2bn in premiums a year because insurance firms are not giving good deals to loyal customers.
An investigation by the financial watchdog, the Financial Conduct Authority, into the pricing of home and motor insurance has found widespread evidence of a so-called “loyalty penalty” whereby long-standing customers are effectively penalised for sticking with their contracts.
The report identifies a range of tactics being used by insurers including selling policies at a discount to new customers and boosting premiums when they renew, specifically targeting increases at those less likely to switch to a new provider for a better deal.
It also found that insurance firms engage in a “range of practices to raise barriers to switching”, such as how they employ automatic policy renewal for customers.
“This market is not working well for all consumers,” said Christopher Woolard, executive director of strategy and competition at the FCA. “While a large number of people shop around, many loyal customers are not getting a good deal. We believe this affects about 6 million customers.”
The FCA’s research found that a third of consumers who paid high insurance premiums were vulnerable in some way, such as having a lower income. For example, it found that among consumers who bought combined contents and building insurance those on lower incomes – under £30,000 – pay higher margins than those on higher incomes.
The interim report outlines a range of actions the FCA is looking at taking to tackle the longstanding issue of overcharging. These include banning or restricting practices such as raising prices for consumers who renew year-on-year, or requiring firms to automatically move consumers to cheaper equivalent deals.
Other remedies under consideration include forcing insurers to stop using practices that discourage customers from looking for better deals elsewhere, and making them be more clear and transparent with customers. This includes considering whether firms should publish information about price differentials between their customers.
“We have set out a package of potential remedies to ensure these markets are truly competitive and address the problems we have uncovered,” Woolard said. “We expect the industry to work with us as we do so.”
The regulator also said its move two years ago to force home, motor and pet insurers to inform customers of price rises in their renewal letters has led to £185m in savings annually from policy holders switching to better deals.
The FCA said will publish its final report, including its consultation on which remedies to introduce, in the first quarter next year.
Customers who stay loyal to their mobile, broadband or insurance providers are paying as much as £1,000 a year more than serial switchers – costing them a total £4.1bn more – according to research from the charity Citizens Advice, which filed a “supercomplaint” last year, prompting the CMA to launch an investigation.
In June, the government launched a consultation looking at whether to give the Competition and Markets Authority new powers to impose direct fines where consumer law has been broken. This means the competition watchdog would not have to go through the courts and could intervene earlier and move more quickly.
Ministers believe this will act as a powerful deterrent to firms that are harming consumers with misleading claims, unfair terms and conditions and hard-to-exit contracts.
