More often than not, home and car insurance renewals tend to increase in price year on year for loyal customers. This led to consumer groups calling for action to be taken to stop the loyalty penalty that sees loyal customers at times pay up to 70% more than a new customer.
Therefore the Financial Conduct Authority published a report, outlining new rules for insurance pricing practice, stating: “The FCA is proposing that when a customer renews their home or motor insurance policy, they pay no more than they would if they were new to their provider through the same sales channel.”
Furthermore, it stated insurance companies can set new business prices but cannot gradually increase renewal prices thus tackling the “loyalty penalty” issue.
Car insurers, in particular, were in the spotlight as traditionally, loyalty has almost never been rewarded! With claims of “opaque and complex” pricing structures which separates new customers from loyal customers, targeting the latter for higher pricing.
According to the FCA loyalty pricing earns over £1.2bn for insurers, affecting millions but especially those who are not as savvy when it comes to researching and shopping around for competitive quotes.
Gap insurance experts ALA have 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.”
As experts in this area, ALA finds that improvements have been made over the years but often their customers still speak of GAP offered by dealers at hugely inflated premiums.
This reform would represent the most significant change to current insurer’s business models since the increase of comparison websites in the last 20 years. Ultimately the aim of this reform is to promote better outcomes for customers by: increasing competition, reducing the price of insurance, reducing premiums for consumers and most of all prevent some of the most worrisome practices that lead to exploiting older consumers.
The policy statement and new rules are expected to be published next year and the FCA will have to monitor closely how companies adapt to these new rules to ensure optimum customer satisfaction and also take enforcement action if necessary.