Insurers will no longer be able to charge existing customers more than new ones under rules unveiled by financial regulator the FCA.
Price walking, the practice of automatically increasing the premium when it is renewed regardless will also be stopped.
The proposals follow months of consultation with the industry and years of complaints from consumer groups that the industry unfairly penalises loyal customers.
A super-complaint from Citizens Advice prompted the investigation by the FCA.
“These measures will put an end to the very high prices paid by many loyal customers,” said Sheldon Mills, the FCA’s consumers and competition director, though he did concede that it might mean higher prices for newer customers or those who search around looking for the best deals.
“Consumers can still benefit from shopping around or negotiating with their current provider, but won’t be charged more at renewal just for being an existing customer.”
The pricing, auto-renewal and data reporting remedies come into effect on 1 January 2022, while companies need to have systems and controls, product governance and premium finance in place by September.
The FCA said that the proposals will save loyal customers an estimated GBP4.2bn over 10 years and added that 10mln motor or home insurance policies have been held for longer than five years.
As an example, the FCA said a customer with a motor policy that originally cost GBP285 would be paying GBP385 if they stayed with the same insurer for five years.
Charlotte Clark, Director of Regulation at the Association of British Insurers, said: “Insurers support these reforms and will continue working closely with the FCA to ensure they are delivered effectively.
“While the FCA recognises their interventions could lead to price increases for consumers who regularly shop around, these remedies should ensure that all customers get fair outcomes from competitive insurance markets.
“It is vital that the new rules are applied across the whole insurance market, including price comparison websites and insurance brokers, with a uniform level of supervision and monitoring by the FCA, to ensure good customer outcomes.”
Share prices move higher
Shares in insurers reacted calmly to the announcement, which had been expected.
Peel Hunt said discounting across new business and renewals introduces a competitive element in insurers’ pricing models.
“It will therefore be key how agile insurers’ pricing models are in order to be able to defend and/or win market share
Admiral is exclusive to comparison sites with its Motor policy mix weighted towards renewals (we estimate c. 70%) rather than new business.
In a world of discounting, ADM would look to see how competitive it can be and given its pricing agility perhaps seek to win some market share.
Direct Line Group’s mix is largely driven by renewals (c.80% of policies), hence there could be a more material adjustment of the back book’s pricing models, something DLG has already been addressing.
Sabre already prices new business in line with renewals, and therefore its pricing models should not be directly affected by the new FCA measures. However, with 80% of distribution via the broker channel SBRE is dependent on whether its broker channel remains competitive.
Direct Line PLC (LON:DLG) shares added 2.4% to 302.2p.
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