FCA launches measures to protect consumers from insurance loyalty penalty

28th May 2021

The Financial Conduct Authority (FCA) has announced a package of remedies to improve competition and protect home and motor insurance customers from loyalty penalties. The changes mean that people renewing their home or motor insurance will pay no more than they would as a new customer from January.

The FCA says that these measures address the issues identified by the regulator’s September 2020 market study, which found that millions of home and motor insurance customers lose out if they renew repeatedly with their current providers. In 2018, 6 million loyal policy holders would have saved £1.2 billion had they paid the average price for their actual risk.

Many firms increase prices for existing customers each year at renewal – this is known as price walking. This means that consumers have to shop around and switch every year to avoid paying higher prices for being loyal.  It also distorts the way the market works for everyone.  Many firms offer below-cost prices to attract new customers. They also use sophisticated processes to target the best deals at customers who they think will not switch in the future and will therefore pay more.

The FCA’s says the new rules will stop firms price walking.  Insurers will be required to offer renewing customers a price that is no higher than they would pay as a new customer. It is likely that firms will no longer offer unsustainably low-priced deals to some customers. However, the FCA estimates that these measures will save consumers £4.2 billion over 10 years, by removing the loyalty penalty and making the market work better.

In addition to the new rules on pricing for home and motor insurance, the FCA is also bringing in new rules to:

  • Give most consumers easier methods of cancelling the automatic renewal of their policy,
  • Require insurance firms to do more to consider how they offer fair value to their customers, and
  • Require home and motor insurance firms to report data to the FCA so that it can supervise the market more effectively

Sheldon Mills, Executive Director, Consumers and Competition at the FCA said ‘These measures will put an end to the very high prices paid by many loyal customers. Consumers can still benefit from shopping around or negotiating with their current provider – but won’t be charged more at renewal just for being an existing customer.”

“We are making the insurance market work better for millions of people. We will be watching closely to see how the market develops in the future and to ensure firms continue to deliver fairer value to consumers.”

The pricing, auto-renewal and data reporting remedies come into effect on 1st January 2022. The rules on systems and controls, product governance and premium finance take effect from the end of September 2021.

Commenting on the announcement Matthew Upton, Director of Policy at Citizens Advice, said “It’s more than two years since we submitted our super-complaint on the £4 billion-a-year loyalty penalty paid by consumers  across the mortgages, savings, mobile, insurance and broadband markets. We’re pleased to see the FCA setting the bar so high in stamping out this systematic scam, and we now need to see similar action in the other markets.”

“No longer will loyal insurance customers face price-walking – gradual year-on-year increases – that can leave them paying way over the odds. Instead firms will have to do the right thing and offer them the same deal as a new customer.”

“For us, and those loyal customers, this fix cannot come soon enough.”

Gareth Shaw, Head of Money at Which?, said: “For far too long, insurance companies have employed sharp pricing tactics to lure in customers before hitting them with eye-watering price hikes and exorbitant premiums, so it is right that measures will finally be introduced to help put an end to these unfair practices.”

“It is vital that the regulator keeps a close eye on insurance firms to ensure they don’t find new ways to exploit customers and should be ready to take further action where necessary.”

“Greater transparency is still needed on what factors insurance firms are using to set prices and the FCA should carry out further work looking at whether there are other practices firms should be prohibited from using.”

Sarah Coles, Personal Finance Analyst, Hargreaves Lansdown said “The FCA will stop car and home insurers from ripping off their most loyal customers. However, regular switchers will pay the price. It’s something we’ve seen regularly from the FCA now, where efforts to protect the most vulnerable customers, end up costing savvier consumers more.”

“The new rules will kick in on 1 January 2022, and mean insurers can’t charge loyal customers more than they would pay as a new customer. They also have to make it easier to cancel automatic renewal, and report data to the FCA so they can keep an eye on the market.”

“The aim is to halt ‘price walking’, where loyal customers see their price increased every year because the insurer is confident price rises won’t be enough to send them packing. It’ll save loyal customers billions of pounds, but price walking doesn’t just affect loyal customers.”

“It has also distorted the market so that insurers focus on cutting the cost for new customers above all else. They’ll even offer loss-making deals in order to bring new customers in. The new rules will put a stop to this, because insurers won’t have any incentive to offer incredibly cheap deals to attract customers they hope to price walk later. It means regular switchers will see their costs rise.”