Could this be the end of the insurance ‘loyalty penalty’?

When it comes to a wide range of services on the consumer market, loyalty is undervalued. Customers may find that if they stick with the same company year-on-year, they will end up getting charged a lot more than someone who frequently switches. In fact, Citizen’s Advice found that loyal customers across essential markets could be overpaying by as much as £987 a year. It’s a frustrating truth which applies across many different sectors, including mobile and broadband, energy and financial services.

So, who does the loyalty penalty affect? Often, it’s the most vulnerable consumers who pay the price including those who are older, have lower incomes or are less educated. Many customers don’t even know that they’re being penalised for their loyalty, with up to 64% not realising they were being charged the same or more than newer customers. But it’s not just the vulnerable that are targeted. Research by Citizen’s Advice found that 8 in 10 bill payers are being vastly overcharged for remaining loyal to a company in at least one essential market.

Loyalty penalties within the Home Insurance market 
According to the same research, approximately 12.9 million households within the UK are likely to be paying a loyalty penalty by remaining with the same Home Insurance provider, or 63% of the overall market. For the 1 in 3 customers who held the same policy for over 5 years, they could be paying up to 70% more than new customers. Of the households affected by the loyalty penalty, 32% of these were over 65 and in the vulnerable category,

Why does the loyalty penalty exist?
Over the years, the world has become increasingly digitised which means that a lot of processes are automated. Often loyalty penalties occur because policies are set up to automatically roll over and renew at a higher rate, meaning that customers are paying more for the same service. Sometimes these increases rise sharply, while others gradually increase over a longer period of time. Often in areas like broadband and energy services, customers are on an older tariff which doesn’t offer the same competitive pricing as their newer tariffs.

While GOV.UK acknowledges that making attractive introductory offers isn’t necessarily harmful in itself, it can become a problem when this gets exploitative. They believe it raises particular concern when:

  • suppliers make it more difficult than it needs to be for customers to exercise choice and then exploit those who do not switch
  • the price gap is large, with some paying very high prices, or it affects many people
  • it particularly harms those who may be vulnerable such as the elderly, those on low incomes, or with physical disabilities or poor mental health
  • it happens in ‘essential’ markets

What is being done to tackle the loyalty penalty?
In September 2018, Citizen’s Advice raised a super-complaint to the Government to highlight that not enough has been done to tackle the loyalty penalty; the following December, the Competition and Markets Authority (CMA) agreed with their findings.

In June 2019, 6-months after their first response, the CMA reported on the progress made and noted that steps have been taken by regulators to tackle this issue and the Government has acknowledged that more needs to be done to protect consumers. Within this, they set out an outline of the best way to achieve change, including; supporting consumers using smart-data and intermediaries to make them aware of the benefits of switching; working on ways to enforce businesses to prevent harmful and exploitative practices and potential pricing interventions, particularly for vulnerable customers.

Tackling the loyalty penalty in Home and Car Insurance
Having found the six million people across the UK are, on average, overpaying £200 on their Home and Car Insurance, collectively overpaying £1.2bn a year, the Financial Conduct Authority (FCA) has proposed a fundamental change to the sector to protect loyal consumers.

Christopher Woolard, interim chief executive of the FCA, said: ‘We are consulting on a radical package that would ensure firms cannot charge renewing customers more than new customers in future, and put an end to the very high prices paid by some long-standing customers.”

Under the FCA’s new proposal, insurers can still set their preferred prices for new customers, but they would be unable to gradually increase an existing customer’s renewal price over time, unless it’s in line with increased risk. Insurers would also need to consider how they can amend their pricing policies to ensure they’re fair for existing consumers and report key information back to the FCA.

Looking for insurance support?
Finding the right insurance can be a minefield, especially when it comes to getting the cover that’s right for you, at the right price. At Prospero, we specialise in arranging tailored personal and business insurance solutions for our customers. As independent brokers, we’re not bound to one insurer which means that we are completely unbiased in the policies we source – our first priority is to get the cover that’s right for you. Our help doesn’t just end after you’ve taken out your policy either. We will be there when it’s time for renewal to ensure you don’t get caught out and if you need to make a claim, we will be by your side each step of the way.

To find out more, just call us on 0800 689 1370.