UK financial watchdog ends ‘loyalty penalty’ for insurance renewals

The UK’s financial watchdog has confirmed it will abolish the so-called “loyalty penalty” on consumers renewing their home or motor insurance policies, estimating it could save customers a total of £4.2bn over 10 years.

Effective from January 2022, insurers will have to offer their current customers a price no higher than what they quote to new customers — stamping out a profitable practice known in the industry as price walking, where insurance costs are raised over time. 

The move follows a long-running campaign by Citizens Advice. The consumer rights charity filed a “super complaint” with the UK’s competition regulator in 2018, pointing out that loyalty penalties were costing customers £900 a year each, across insurance and other products including mobile, broadband, mortgages and savings.

Matthew Upton, director of policy at Citizens Advice, said the Financial Conduct Authority’s move was the first “really strong action” by a regulator to address this problem. He contrasted it with other costly products, such as mortgages, where consumers are still defaulting to much higher borrowing costs on the so-called standard variable rate.

But Fairer Finance, another consumer group, argued that new customers would lose out from the FCA’s move, as insurers increase their initial pricing to compensate for lost revenue over time.

“This will take away the opportunity for those people who care most about price to shop around and get a cheaper price,” said its managing director James Daley.

The FCA’s modelling suggested shopping around would fall as a result of the reforms, but it argued that switching can be “costly in terms of consumer time and firm resources, so a reduction in the level of switching will reduce costs for both consumers and firms”. It thinks the result would be a more competitive market that delivers fairer prices overall.

A drop in switching would pose a threat to the price comparison websites that have disrupted the sector over more than a decade.

But GoCompare, one of the sites, said in statement that other changes announced by the FCA, making it easier for customers to cancel auto-renewals, would encourage switching.

The watchdog also concluded that what are known as non-resolicitation clauses, where price comparison websites agree with insurers not to contact consumers around the time of the first renewal, were anti-competitive. Michael Sicsic, a former insurance regulator who runs his own consultancy, described this as “good news” for comparison websites.

Analysts said the new FCA rules were broadly in line with what they had anticipated. Investors appeared to shrug off concerns about the impact on Direct Line and Saga, two companies that analysts said were more vulnerable to the reforms due to their greater reliance on existing customer renewals. The insurers’ shares were up 3 per cent and 1 per cent, respectively, in early trading.

The FCA concluded that certain incentives that are offered to new customers, such as retail vouchers or getting one month free, must be reflected in renewal pricing, too.

It found that cash discounts and other financial incentives such as retail vouchers, loyalty points and cashbacks “significantly undermined participants’ ability to select the best insurance deal and correctly assess policy premiums”. 

The watchdog will also require insurers to put in governance arrangements, and disclose more data to the regulator, around how they are providing fair value to customers. It will review the effects of the remedies next year, and conduct a fuller evaluation in early 2024.