Insurers have finally been ordered to end the loyalty rip-off after years of campaigning by The Mail on Sunday.
The City watchdog – the Financial Conduct Authority – last week announced that it plans to ensure that insurance companies do not charge existing customers more for the same cover as new customers pay.
The move could save consumers a total of £1billion a year, according to the watchdog. So will the crackdown help you? Here is everything you need to know…
Rip-off: The move could save consumers a total of £1billion a year, according to the watchdog
What exactly is set to change?
The idea is that anyone who takes out home insurance or motor cover should pay the same premiums whether they are a new or existing customer.
We have been warning for years that insurers reel in new customers with special offers – then hike the price each year. The FCA calls this ‘price walking’.
Its report last week revealed firms typically make a loss on some of their new customers in the first year, and start to recover these losses through higher premiums in future years.
After five years, the premiums you pay can be double what a new customer is charged.
Time to crack open the champagne?
Not yet. The City watchdog only announced ‘proposals’ last week. It must now hold a consultation before it introduces the new rules.
The next date to watch out for is January 25 next year, when industry feedback on its final report is due. So with a fair wind, the rules may be rolled out in the spring next year.
Who will benefit from the crackdown?
Long-suffering customers who stay loyal to their insurance provider should get the biggest boost. At least six million of us overpaid on insurance in 2018, according to the regulator. It calculates we might currently save £85 a year on car insurance compared to those who shop around.
For combined building and contents insurance, the savings might average £122 a year.
A motorist who has been with their insurer for five years typically pays £370, while new customers pay £285 on average.
On combined buildings and contents insurance, five-year-old policies cost on average £287, while new customers would pay £165 for the same deal. On average, customers over the age of 65 stayed loyal more than four years. For the under-45s, it was less than two years.
Who will be the big losers?
The bad news is that the savviest homeowners and motorists could end up footing the bill for this drive towards fairer deals all round.
The way the industry has traditionally made money is snaring customers with great initial deals – with the realisation that we often get lazy and just renew our premiums each year. When the new rules kick in, insurers are likely to put up prices for new customers.
So the incentives for signing up, which can be as much as £300 a year for home insurance, will go.
However, under the new rules insurers will still be free to set prices for new customers and offer a range of different types of deals – they just won’t be able to ramp them up after that unless there is a change in the risk that a customer poses.
This does leave room for insurers to charge drivers more as they get older, for example.
So you will still find some providers are cheaper than others and should not give up the habit of switching regularly.
Should I act now – or just wait?
There is nothing to do right now other than to ensure you are not being penalised for showing loyalty when your annual insurance contract next comes to an end.
When the policy is up for renewal, shop around for a better deal using a comparison website or by contacting a handful of insurers directly to see if they can offer you a better price – just as before.
And remember, it can pay to take that price back to your existing insurer and ask them to match or beat it.
You should wait for renewal before switching. Otherwise you can face an exit penalty. The FCA says it hopes over time to boost competition among insurers, which should bring down average prices for everyone.
Can I trust insurers to play fair?
When these changes come in, insurers will need to check the quote an existing customer receives at renewal is ‘no higher’ than a new customer would get.
But the FCA specifies that this refers to a new customer who uses ‘the same channel’ – in other words, you might get different prices if you renew by phone, letter or online.
If insurers tinker with new policy terms and conditions, making it harder to compare deals, the FCA wants them to identify ‘close matching’ products to work out a rough price for a new customer.
‘We think it will be rare that a firm is unable to identify a close matching product,’ the FCA says.
The regulator says it will be keeping a beady eye on how insurers react to the rules – and will clamp down on any underhand tactics – but you should stay on your guard too.