New rules designed to protect those who remain with the same insurers will hit consumers who shop around for insurance, the City watchdog has warned.
The Financial Conduct Authority (FCA) says a decision to ban the so-called loyalty penalty will save customers a total of £4.2bn over the next decade, but will increase costs for those who frequently switch providers. Currently, the majority of home and car insurers entice customers with a cheap deal, on which the firm generally makes a loss, and then hoist prices ruthlessly each year they renew, a process known as ‘price walking’.
As this practice has now been outlawed, insurers are being forced to offer consumers the best price available in their risk bracket regardless of how long they have been a client. Nonetheless, this could mean that firms make good some of the losses on premiums for long-standing customers by increasing those for new ones.
The FCA has shied away from a cap on premium increases, deciding not to implement measures to prevent firms from raising costs to cover lost revenue. Instead, the watchdog said new business prices may rise for some customers, especially those who make it a habit to shop around.
At the moment, customers for new car insurance can expect their premiums to be around 23pc cheaper than those for existing policyholders and householders seeking new home insurance can access deals at almost half the price of those renewing.
Vulnerable, elderly and low paid take a hit
The reforms are likely to impact insurers’ pricing models significantly. Home insurers derive all their profits from customers who have held their policies for six years or longer, research has found.
In 2016, home insurers made a collective loss of £472m on first-year policies, according to the charity Citizens Advice. These accounted for 23pc of the market. Insurers only began to make a profit when policyholders entered their sixth year. Furthermore, customers in their seventh year or higher represented 25pc of the market and delivered £1bn in profits to this sector of the market.
The disparity is less in the car insurance market, where profit margins are slimmer.
Although the FCA has been criticised in the past for being insufficiently proactive, hindered by internal disorganisation and accustomed to handing out derisory fines which do not deter repeat offenders, commentators think its intervention in home and car insurance premiums is important.
Ten million policies in home and car insurance are held by people who have been with their provider for five years or more. A third of those overpaying for cover are vulnerable, elderly or low paid, and the watchdog reckons that 6m households could be overpaying their premiums by £1.2bn annually, equivalent to an average of £200 each a year.
Insurers could pass on savings
While not all that will be recovered, the FCA believes a ban on price walking could save consumers £4.2bn over the next 10 years because the savings insurers make from not having to offer loss-making policies will be passed on.
However, the insurance industry is creative and will rush to find ways to offset the lost income, which is probably why shares in most major insurers rose on confirmation of the ban. In fact, there is evidence that insurers lost no time in ratcheting up premiums in anticipation of this ruling, following an 18-month-long FCA consultation.
The most obvious unintended consequence of all this is that those who choose to shop around will face higher premiums once new customer prices are equalised with renewal prices. The FCA concedes that the ban could bring about an end to the cheapest deals for new customers.
That would be regrettable. But for once, the FCA is thought to have got it right and taken decisive action. Consumers have a right to open and transparent pricing and should not be punished for their unconditional loyalty.