FCA to stop loyalty pricing practice

The FCA is looking to ban car and home insurers from charging loyal customers more money.

It’s fair to say we’ve all come to expect our motor and home insurance renewals to be more expensive year on year if we stick with the same provider. We’ve all had the renewal letter from the insurer, rolled our eyes at the price jump, and gone through the inevitable process of shopping around, using comparison sites and trying to get the best deal without compromising on cover. That could be about to change as the practice of so-called “loyalty pricing” is set to end under new rules from the Financial Conduct Authority (FCA). When customers receive their renewal prices the proposals dictate that they would need to be offered the same premium as a new customer would using the same channel i.e. through a price comparison site or direct to the company. This is instead of gradually increasing a customer’s premium over time (known as price walking) with the only permitted increases being those directly relating to changes in risk.

Loyalty has almost never been rewarded in insurance – the FCA has accused motor insurers of using “opaque and complex” pricing structures which deliberately target loyal customers for higher pricing whilst enticing new customers with a better deal.

The FCA claim that loyalty pricing earns over £1.2bn for insurers, and it can affect over 6 million householders every year. This disproportionately affects those who are not easily able to shop around for competitive quotes, such as older people who may be less familiar with or don’t have access to comparison sites. The practice has been occurring for years but the FCA is finally set to tackle the motor and home insurance markets which are not working well for the customer, putting forward proposals to remedy this. These proposals are out for consultation until January 2021 Christopher Woolard, Interim Chief Executive of the FCA, commented:

We are consulting on a radical package that would ensure firms cannot charge renewing customers more than new customers in future, and put an end to the very high prices paid by some long-standing customers. The package would also ensure that firms focus on providing fair value to all their customers. We welcome feedback on the proposals.

Simon England MD of ALA has said that, based on a similar undertaking by the FCA to tackle high GAP insurance premiums charged by motor dealers, we know from experience that the aims of the FCA reforms and the outcome can end up being quite different. He added

As part of a historic review the FCA found that a large proportion of car buyers were being severely overcharged for GAP cover, premiums being added onto customer purchases without their knowledge, being told they couldn’t buy it from anywhere else and were generally given poor service. Essentially the practices were not dissimilar to the misselling issues which occurred with PPI.

Ultimately whilst improvements were made, the industry was left to self-regulate – our customers often still tell us about GAP offered by dealers at hugely inflated premiums, meaning not all spurious practices have been eradicated and with very little follow up by the FCA. The long term aims of the motor and home insurance reforms are to increase competition, reduce the cost price of insurance and so ultimately reduce premiums for consumers. In the opinion of ALA, anything which promotes better outcomes for customers is an excellent result. It simply remains to be seen how much the final changes mirror the original intent, and how effective the FCA will be in monitoring insurers going forward.