Watchdog looks at ban on insurers’ loyalty premiums

The UK’s financial regulator is weighing whether to ban insurers charging a loyalty premium in an attempt to prevent about 6m UK policyholders being overcharged about £1.2bn a year.

The Financial Conduct Authority said the market for the pricing of home and motor insurance products was “not working well for all consumers” as it laid out its findings of a sector-wide study on Friday. It is particularly concerned about how customers who do not shop around for products are penalised by higher prices.

The watchdog’s study found that insurers jack up prices for customers unlikely to switch, and make it hard for policyholders to shop around.

In response, it is considering tough measures such as forcing companies to put customers on the cheapest equivalent deal, or making them publish the price differentials between customers, or even an outright ban on raising premiums for policyholders who renew. It will put out its final rules in the first quarter of 2020.

The proposals knocked general insurers’ shares in early London trading on Friday, with Direct Line falling nearly 3 per cent before trimming its decline to 1.2 per cent. Motor insurer Admiral Group dropped 0.9 per cent, Hastings shed 2.2 per cent and Aviva declined 0.6 per cent. Stocks in Saga, the specialist in over-50s products that includes insurance, followed suit with an about 4 per cent drop. Shares in the price comparison site Moneysupermarket rose 1.5 per cent.

Christopher Woolard, executive director for strategy at the FCA, said: “This market is not working well for all consumers. While a large number of people shop around, many loyal customers are not getting a good deal. We believe this affects around 6m consumers.”

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The watchdog is worried that vulnerable people account for about a third of these policyholders, and that those on lower incomes are paying higher margins for combined contents and building insurance.

The FCA’s study comes after Citizens Advice, a leading consumer charity, made a “super complaint” a year ago to the Competition and Markets Authority over the loyalty penalty that it thought amounted to about £4bn a year across five sectors. The FCA said at the time it would support the CMA’s work on the loyalty penalty.

Citizens Advice said the mobile, broadband, home insurance, mortgages and savings markets were ripping off loyal customers by about £900 a year.

“We’re especially happy to hear the regulator say that everything is on the table to make sure customers are getting a fair deal,” Gillian Guy, chief executive of Citizens Advice, said on Friday. “This includes tackling gradual year-on-year price increases and making companies automatically switch their customers to better deals.”

She added: “At the moment these are just proposals. The FCA must now follow through on these bold ideas to stop loyal insurance customers being penalised.”

One person who came to Citizens Advice is Paul, from Staffordshire, whose mother-in-law was paying £800 in home and contents insurance for a terraced house. He found equivalent deals online for about £300.

“She is an 89-year-old lady and doesn’t have the capacity to sort all of that out herself,” he said. “I feel like she’s been cheated. And I think it seems like common practice, to rip off the people who are most vulnerable.”

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