The Financial Conduct Authority (FCA) has announced measures designed to improve competition and protect home and motor insurance customers from the loyalty penalty.
Historically, existing customers of home and motor insurers have had premiums increase year on year, often resulting in a more expensive policy that what they would receive as a new customer.
In its market study published in September 2020, the FCA found the millions of home and motor insurance customers lose out financially if they repeatedly renew existing insurance policies with their current providers.
In 2018, the FCA found that six million policy holders would have saved £1.2bn had they paid the average price based on their actual risk.
The FCA’s rules will stop this from taking place as insurers will be required to offer renewing customers a price that is no higher than they would pay as a new customer.
It is estimated that these measures will save consumers £4.2bn over 10 years, by removing the loyalty penalty and making the market work better, the regulator said.
The rules will also simplify the cancellation of automatic renewals for consumers, force insurance firms to consider how they offer fair value and require home and motor insurers to report data to the FCA.
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 January 1 2022.
The rules on systems and controls, product governance and premium finance take effect from the end of September 2021.
Mohammad Khan, UK insurance leader at PwC UK, said: “After the FCA Pricing Practices is implemented, in January 2022, we believe that overall prices will rise by between 5% and 9% for customers who regularly shop around as insurers remove the new business discount that can no longer be offered.
“Until then competition for motor and home policies will remain fierce. Our forecast for the rest of this year is that premiums will drop by between 5% and 7% due to this competitiveness.”
Alongside its policy statement, the regulator has also looked more closely at how incentives affect consumers’ choices, specifically on purchases of motor and home insurance made through price comparison websites.
The research found that cash discounts and cash-like promotions, such as retail vouchers, loyalty points and cashbacks, “significantly undermined participants’ ability to select the best insurance deal and correctly assess policy premiums”.
The updated rules put in place by the FCA make it clear that such promotions “must be clear and not confuse or disguise the price of the insurance product”.