The home and motor insurance industry has come under scrutiny recently after the Financial Conduct Authority (FCA) conducted an investigation and produced a report into ‘price walking’. But what exactly is this practice and how has this investigation been received by the industry?
Price walking effectively refers to the practice of insurance companies increasing costs every year for customers that have remained loyal to the schemes. This has created much ire as the price hike is often not matched with any increase in the benefits offered by the insurance cover to the customer.
The FCA said firms often target price increases on customers who are less likely to switch and adopt practices that make it harder for people to leave.
To add more salt to the wound – increases are automatically imposed even if the customer hasn’t made any claims on the policy. Customers are further disappointed when they see new customers enticed with cheap deals for switching or taking out a new policy with the same company.
Will other types of policies be looked at?
Up until now the focus has been on motor and home insurance policies but other sectors including pet, health and travel are also set be investigated for this practice.
This practice is nothing new. For a number of years now it’s become a known fact that loyal customers who stick with a company typically end up paying more than those who have just joined. In the past, it was considered a good thing to remain loyal to brands, but this perception is being skewed by some insurers who appear to be making their profits their only priority.
Through market research, the FCA found significant price competition for new customers with new policies. Many companies were slammed for not sending out policy renewal information. There was also evidence of six million policy holders who were overpaying in 2018. The FCA pointed out that if they had paid the average for their risk, they would have saved £1.2 billion.
Savvy customers keen not to be affected by the ‘loyalty penalty’ resort to switching policies constantly and often try to find new policies with better benefits on price comparison websites. But this is often where they are also enticed by new deals only to have their premiums hiked after about a year.
Factors such as age, location, marital status all have had an impact on whether customers are faced with dual pricing or not.
Is this supported in the industry?
But there are equally (and thankfully) many companies – particularly insurtechs – that are seeing the bigger picture and are supporting an end to this ‘loyalty penalty’ and want to ensure that there is fairness among all customers.
By Miles are one of many companies standing by the ban of price walking. They have introduced a policy called ‘best price promise’, which ensures there are no hidden fees or annual cost increases for loyalty purposes.
Insurers still have some time to sort out this pricing anomaly. The FCA has said companies have until January 2021 to give the same renewal prices for all customers.
The FCA says it’s also consulting on introducing other new measures to further boost competition and deliver fair value to all insurance customers, including:
- Product governance rules requiring firms to consider how they offer fair value to all insurance customers over the longer term.
- Requirements on firms to report certain data sets to the FCA so that it can check the rules are being followed.
- Making it simpler to stop automatic renewal across all general insurance products.
It seems that many are just looking for transparency from their insurance companies. So, while the FCA is imposing these new rules, it’s really in the industry’s best interest to follow through with them to restore some faith among customers. The price walking ban will reportedly help policy holders to save £3.7 billion per year.
With the furlough scheme coming to an end and still no end in sight to the Covid-19 pandemic, price walking and other hidden costs could be the reason why many will ditch policies and not renew. Ditching price walking as a practice appears to be the answer, ironically, to ensuring that customers stay loyal.
Sources: Insurance Times, BBC, FCA