Loyal insurance customers should not pay more, says FCA

About 10 million home and car insurance customers should save nearly £120 a year each after the UK financial regulator effectively banned the industry from charging higher premiums to loyal customers.

In its toughest crackdown on the insurance industry for many years, the Financial Conduct Authority said firms will have to offer a renewal price that is no higher than the price being offered to new customers. It said the move will save consumers – mostly elderly and low income groups who do not shop around – about £3.7bn over the next 10 years.

Research by the FCA found that customers who stay with the same provider year after year, believing that loyalty pays, are systematically overcharged. Someone with the same car insurer for five years typically pays £370, compared with £285 for a new customer.

The gap is even wider for loyal customers of home insurance policies. New customers for buildings insurance tend to pay £130, while loyal customers pay £238.

The FCA estimated that 10 million customers have been with their provider for five years or more, and that they will typically save £55 on their home and £62 on their car insurance after the changes, due to take place in 2021 after a consultation period.

The move comes after years of campaigning by consumer groups angry over the “loyalty penalty” paid by millions of households. Citizens Advice issued a “super-complaint” nearly two years ago against the practice, which it described as a “systematic scam”.

The Guardian has highlighted some of the most egregious cases, where elderly home owners have been found to be paying four or five times as much for their insurance as new customers.

In one case, an 85-year-old in a three-bed terraced house in Leamington Spa was paying £700 a year for her home and contents insurance, when the rate for a new customer was just £144.

Dame Gillian Guy, the chief executive of Citizens Advice, said: “It’s nearly two years since we submitted a super-complaint on the loyalty penalty and we’re pleased to see the FCA is proposing strong action to crack down on this systematic scam.

“We’re especially happy to see it tackling price-walking – gradual year-on-year price increases – and making companies automatically switch their customers to better deals.”

Shares in Direct Line, one of the UK’s biggest car and home insurers, fell by 5% and RSA was down 3%.

The FCA admitted there would be winners and losers from the changes, with some increases in prices for new customers as those for loyal customers come down.

It said: “We do not want to stop good deals being available to customers who shop around and switch regularly, so we have taken steps to reduce this potential risk from the proposed remedies. We expect our remedies to improve the nature and intensity of competition. This would mean firms competing in a more effective and innovative way, which should lead to lower overall costs for supplying insurance, more intense competition and ultimately lower average prices paid by customers.”