Savvy drivers and homeowners who switch their insurance provider every year may be facing a steep rise in the premiums on offer from next year.
The financial watchdog is proposing to ban what has become known as the ‘loyalty penalty’ from late 2021, potentially saving some 6 million customers £3.7billion over 10 years.
Currently in the motor insurance market premiums rise by an average of 2.54 per cent at renewal, according to Consumer Intelligence. In home insurance, premiums go up by an average 12.67 per cent every year.
Banning this will mean that insurers can no longer reserve the best deals for new customers while at the same time charging more to existing policyholders who don’t switch away when they renew.
It comes after years of campaigning from This is Money and others warning about the penalty and encouraging customers to fight back.
While the rule change is good news for the majority of policyholders who choose to stay with their existing provider, it is likely to penalise those who have bothered to shop around.
Insurance experts Consumer Intelligence said: ‘One thing is absolute – premiums are going to rise.
‘In the current model, insurers offer heavily discounted new business prices to acquire new customers, but don’t make profit until year two or three of the policy. So naturally, prices will need to even out to support the sustainability of the industry.’
The price of loyalty penalty
The FCA has calculated the differences in prices paid by existing and new customers who have been with their provider for more than five years. Annual policy prices for a typical risk, on average:
Motor insurance: New customers pay £285, existing customers £370
Buildings insurance: New customers pay £130, existing customers pay £238
Combined buildings and contents insurance: New customers pay £165, existing customers pay £287
Contents only insurance: New customers pay £56, existing customers pay £138
Insurers have come in for a lot of bad press during the pandemic.
Many refused to pay out to thousands of businesses affected by Covid, despite a recent court order stating that they should have done.
Car insurers also continued to charge full price for motor policies when most of the public were locked down in their homes.
These same companies were simultaneously saving billions as payouts dropped while drivers stayed off the roads and accidents became less frequent.
Some insurers did refund their customers. Admiral moved to automatically give motor customers back £25 during lockdown and said it has been rewarded by a surge in brand loyalty and renewals.
This time last year Admiral’s customers were among the most fickle of the bunch, with 86 per cent shopping around at renewal, above the market average of 83 per cent.
But research from Consumer Intelligence found a step change during lockdown. As many as 21 per cent of Admiral customers renewed their car insurance without shopping around in the four months to July.
This could be a sign that policyholders are starting to become more shrewd about which insurance company they deal with.