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Insurance reforms short change UK customers

Personal Finance Advice & Comment updates

An end to the loyalty penalty is promised. At least that’s what we call it in the press. It means insurance companies that charge old customers — and often that describes their age as well as their time with the firm — a lot more than new customers who are tempted with low, low prices and then, as they become loyal customers, are hit with annual rises in their premiums.

It is so embedded in the business model of the insurance industry that it has been given its own pet name — price walking. Gently walking up the price in the hope no one will realise. It is a classic invention of those clever people in the Taking Money Off Customers Without Them Noticing department.

I once made a joke about the TMOCWTN department in a conference speech. Afterwards, someone told me: “You’re so right! I worked for one of those. We called it the retail innovations unit!” These are the sort of people who put frogs in a pan of cold water and slowly heat it up to see if they escape before they boil. 

Eight years ago I interviewed the chief executive of a well-known insurer for the BBC radio’s Money Box programme after we found that some of his loyal and elderly customers were paying five times as much for their home insurance as new customers.

One woman was quoted a renewal of £1,214 a year for a two-bed semi in Surrey. Her family went online and insured it with a different firm for £236. Another man found new customers could be insured by the same firm for half the price his elderly mother was paying. But the insurance boss did not see anything wrong. “These were individual cases, we are in an intensively competitive environment, there are discounts for new customers, always looking at pricing”, etc.

The Financial Conduct Authority came up with a cunning wheeze to expose this practice. Since January 2020 a renewal notice must show last year’s price as well as the new price, in the hope that would shock people into asking why and, maybe, finding a cheaper deal. It was less effective than hoped, not least because the regulator did not specify the bill should explain in big type “last year you paid £yyy.yy but this year we are raising your price by xx per cent, which is n times the rate of inflation”. 

So from 2022, almost nine years since the media highlighted this practice, the regulator will finally ban loyalty penalties and price walking, but only in home and motor insurance.

It says ending price walking will save consumers £4.2bn over 10 years. Put another way, the insurance industry has been overcharging these customers by £420m a year since price walking was widespread. What, you might ask, was their punishment for not treating customers fairly over the previous decade? Nothing. Zero. Zilch. Caught with the stolen goods in their hands they weren’t even made to give them back. Just told not to do it again. But only after January 1 2022. 

Call me cynical (you would not be the first and it is how I make my living), but I am sure the big insurers already have those clever people who invented price walking looking for ways around these new rules.

And if they do not find them I suspect they will increase the cost of other unfair practices. Raise your premium if you call to ask if you are covered for a small scratch. Give you a voucher for a cheap replacement if your Victorian ring is lost. Refuse to pay on business interruption insurance during the pandemic. A £25 admin fee if you change address or add a driver. 

Market research by the Financial Conduct Authority also found that cash discounts and promotions, such as retail vouchers, loyalty points and cashbacks, “significantly undermined participants’ ability to select the best insurance deal”.

So tough new rules will ban cash or gifts to tempt customers in. However, an exemption will allow soft toys to be given and the rules also allow putting customers in a draw to win back their premium or be promised “carbon offsetting”. Look out for large cuddly lions made by a company that plants a tree for each one sold with a QR code on their front paw to enter a lottery. 

Optimistic industry watchers expect there will be new emphasis on “value” rather than price such as customer service and helpful helplines. But also expect new deals with price comparison websites which, robbed of their fees for switchers, will need to make more money from secret agreements with insurers whose names then appear in their best buy tables.

New reporting requirements will give the FCA plenty of data to monitor these changes. But concern for commercial sensitivity means it will be kept secret. Customers won’t know how insurers are interpreting the rules or which are the worst offenders. They won’t be able to judge for themselves whether this latest attempt to control the TMOCWTN department is working or not.

Paul Lewis presents ‘Money Box’ on BBC Radio 4, on air just after 12 noon on Saturdays, and has been a freelance financial journalist since 1987. Twitter: @paullewismoney

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