Buyers beware of insurers overcharging loyal customers

I am ashamed to admit this: I used to be a loyal customer. I trusted my insurance company to play fair.

My folly ended when the home insurer disputed a claim and I decided to check out other policies. My eyes were suddenly opened — I realised how much money I could save on my annual premium by switching insurer.

I am hardly alone. A 2018 report from the Financial Ombudsman Service (FOS) shows the extent to which loyal customers like me had repeatedly overpaid for our insurance, wasting hundreds of pounds every year by failing to switch.

Fortunately, the Financial Conduct Authority (FCA) has called time on all this gouging. It has decided that insurers should no longer be able to charge renewing customers more than new customers. It will put an end to what it describes as the “very high prices paid by some longstanding customers”. 

Unfortunately, the industry has successfully delayed the start of the new regime. It should have come into operation at the end of next month but the insurers were able to persuade the FCA that they were unable to bring in a fair charging system until the end of 2021.

Until the new rules apply — and probably afterwards too — we will have to make sure we are not exploited by insurance companies. GoCompare, the price comparison site, reports that 43 per cent of UK consumers do not switch any of the 10 most popular financial products including car and home insurance. Only 19 per cent switched motor insurance and 14 per cent moved home policies last year leaving them vulnerable to being seriously overcharged. 

Which?, the consumer magazine, found in 2019 that home insurance can cost loyal customers up to three-quarters more than new customers. New customers were being charged an average premium of £200. For customers who had been with their insurer for one to two years, premiums rose by 20 per cent; they paid an average of £240 a year. At its most extreme, people who had stayed with their insurer for 15 to 20 years were paying 75 per cent more than new customers. 

The FOS details the case of Mr A, who lived in a two-bedroom terrace house for which he was charged home insurance of £1,400 a year. He had not made a claim in 15 years. His nephew found similar cover from another insurer for £150. He also got a quote from his uncle’s existing insurer for a more comprehensive homes insurance policy costing £300.

Mrs L, a teacher in her 40s, took out an insurance policy when she bought her first home and stayed with the company for 15 years. Then she discovered that her insurer had introduced a new policy offering the same level of cover, costing £1,000 less per year.

She took out the cheaper policy and complained to the company about overcharging. It refused to refund her. She took her case to the FOS which required the insurer to pay her the difference in cost between the new policy and the one she had had, plus 8 per cent interest. 

The FOS said: “Our service doesn’t regulate pricing. But when someone has a complaint about the cost of their insurance and how much they’ve been charged over time as a loyal customer, we’ll look to see that they’ve been treated fairly.” 

I bought my first contents policy — with a top 10 insurer — when I bought my first home in Sheffield. I renewed it without question every year. When I moved to London I stayed loyal to my insurer. I believed that I was paying high premiums because I lived in a Georgian house in a high crime area.

When I moved into a new property in Sussex, my premium — still with the same insurer — increased to £1,600 a year. But still I did not complain until I needed to make a claim. My son was mugged on a train in 2009 and had his new MacBook computer stolen. The laptop was just seven weeks old and had cost £1,300, but the insurance company offered just £400 to buy a cheaper computer.

After doing battle to get the full replacement price, I checked out the cost of renewing with another company. The best deal was £400 with Direct Line — a saving of £1,200 a year.

Within months the new cover was tested when a burglar tried to get into our new home, damaging expensive doors and triple-glazed windows imported from Sweden. The cost of replacing them was £4,000. Direct Line supplied like-for-like replacements and used skilled craftsmen to install them.

My premium has stayed just below £400 because each year I check the market and challenge any increase. I also increased the excess on the policy and have not had to make another claim.

The Financial Conduct Authority estimates the “loyalty penalty” costs around 6m policyholders £1.2bn a year. Called “price walking” it is the practice of charging customers increasing amounts the longer they stay with the insurer. 

The Association of British Insurers told me: “For the measures to work, it is important that there is sufficient time to implement them — not just for insurers, but for other market participants including price comparison websites and intermediaries. This will include checking that individual customers are currently on the best deal from their provider.”

The ABI said it was vital that price comparison websites and insurance brokers were subject to the same level of supervision and monitoring by the FCA. Price differentials between new and existing customers were a feature of competitive markets.

Meanwhile, there is some good news. Motor insurance should be cheaper because drivers have not been using their vehicles so much. But it will not necessarily happen automatically. It is worth getting details of your mileage when renewing and if it is much reduced you may be able to get an intra-year reduction. Last week, Confused.com, the price comparison site, said that motor insurance premiums have already fallen by 14 per cent year on year, the biggest fall for almost six years. To ensure we get the benefit we need to be disloyal — switch insurers or insist our existing one gives best value.

Lindsay Cook is the co-author of “Money Fight Club: Saving Money One Punch at a Time”, published by Harriman House. If you have a problem for the Money Mentor to look into, email money.mentor@ft.com