The Financial Conduct Authority says that millions of consumers are overpaying on their home and car cover
Insurers could be banned from hiking the premiums of loyal consumers when they renew their policies under new measures to tackle concerns about high insurance prices.
In an interim report, the city watchdog says it has found widespread evidence of the so called ‘loyalty penalty’, where customers pay higher costs for staying with the same product, while new customers are charged significantly less.
The Financial Conduct Authority (FCA) estimates around six million home and motor insurance policy holders are overpaying around £1.2 billion a year and are not getting a good deal on their insurance.
It says that it could ban or restrict firms automatically raising prices at renewal and require them to move consumers to cheaper equivalent deals to deal with the problem.
Christopher Woolard, executive director of strategy and competition at the FCA, says: “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 six million consumers.
“We have set out a package of potential remedies to ensure these markets are truly competitive and address the problems we have uncovered. We expect the industry to work with us as we do so.”
The research found that one in three consumers who paid high premiums were vulnerable, for reasons such as having lower financial capability.
For example, consumers who bought combined contents and building insurance on lower incomes - below £30,000 - pay higher margins than those with higher incomes.
The watchdog also says that most firms, when setting a price, include their expectations of whether a customer will switch or pay an increased price, which is not made clear to the customer.
Other potential remedies by the regulator could include stopping practices that discourage switching, including restricting the way that firms use automatic renewal.
It is also considering whether firms should publish information about price differentials between their customers and making them be more clear and transparent.
The FCA says that since it forced home, motor and pet insurance companies to inform customers about price hikes at renewal two years ago, it estimates consumers have saved £186 million a year.
The Association of British Insurers director general, Huw Evans, says: "We welcome today’s report from the FCA, and the industry will continue to work constructively with the regulator to ensure that the market works better for customers. It is important that any unintended consequences are carefully considered to ensure that a fair and balanced approach is achieved for all customers.
“Millions of insurance customers get extremely good deals by shopping around regularly, but we agree that the household and motor insurance markets could work better for consumers who do not shop around at renewal. This is not an issue unique to insurance, but we are the only sector to have taken voluntary steps to address the issue and these are bearing fruit already.”
Last year, the Citizens Advice submitted a super complaint to the Competition and Markets Authority on consumers being ripped off with a loyalty penalty for broadband, home insurance, mortgages, mobile phone contracts and savings.
The charity claimed that customers who stay with the same supplier for household services and don’t switch could be overpaying by as much as £4.1 billion a year.
Gillian Guy, chief executive of Citizens Advice, says: “It’s great to see the FCA acknowledging that the insurance market isn’t working for consumers and pledging to crack down on the loyalty penalty.
“We’re especially happy to hear the regulator say that everything is on the table to make sure customers are getting a fair deal. This includes tackling gradual year-on-year price increases and making companies automatically switch their customers to better deals.
“At the moment these are just proposals. The FCA must now follow through on these bold ideas to stop loyal insurance customers being penalised.”