New rules banning a “loyalty penalty” on insurance will save consumers £4.2bn over ten years – but could also reduce cut-price switching deals, the UK financial watchdog said.
The Financial Conduct Authority (FCA) has confirmed a ban on car and home insurance renewal quotes being any more expensive than they would be for new customers, which will come into effect on 1 January next year.
It has previously found – in a 2018 study – that customers who stuck to their policies were paying £1.2bn a year too much.
Home insurance renewals are also covered
The FCA scrutinised a practice known as “price walking” – where firms increase prices for existing customers each year at the time of renewal.
It means that customers have to shop around and switch every year to avoid paying the price of being loyal and distorts the market, the watchdog found.
The FCA said firms were offering deals at below-cost prices to attract new customers, using “sophisticated processes to target the best deals at customers who they think will not switch in the future and will therefore pay more”.
It said its new rules – confirming the findings of an interim report last year – would end the practice.
“Insurers will be required to offer renewing customers a price that is no higher than they would pay as a new customer,” the FCA said.
“It is likely that firms will no longer offer unsustainably low-priced deals to some customers.
The FCA says consumers will save billions
“However, the FCA estimates that these measures will save consumers £4.2bn over ten years, by removing the loyalty penalty and making the market work better.”
The FCA said it was also bringing in new rules to make it easier for consumers to cancel automatic renewals of their policies and force insurance firms to do more to consider how they offer fair value to customers.
Sheldon Mills, executive director for 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.”