Shares in leading UK general insurers including Aviva (AV.), Direct Line (DLG) and Legal & General (LGEN) gained after the Financial Conduct Authority introduced new rules to protect loyal customers but stopped short of punishing companies for over-charging in the past.
An FCA study of the insurance market in September 2020 found that millions of home and motor insurance customers lose out when they renew repeatedly with their current providers.
PENALISED FOR BEING LOYAL
The regulator estimates that in 2018 as many as six million policyholders would have saved £1.2 billion, or an average of £200 each, if they had paid ‘the average price for their actual risk’ rather than their insurers overcharging them for staying loyal.
Most insurers increase prices for existing customers each year when they come to renew their policies – a practice known as ‘price walking’. This means consumers have to shop around for a better price rather than be penalized for staying with the same insurer.
The FCA is concerned that price walking distorts the market. ‘Many firms offer below-cost prices to attract new customers. They also use sophisticated processes to target the best deals at customers who they think will not switch in the future and will therefore pay more’, it says.
If firms no longer offer unsustainably low-priced deals to win new customers and stop the practice of walking prices up for existing customers, the regulator believes consumers could save as much as £4.2 billion over 10 years.
NO RETROSPECTIVE FINES
Firms have until the beginning of October to put in place the systems, controls and governance to comply with the FCA’s rules, which come into force on 1 January next year.
Failure to comply or a delay in implementing the rules will mean firms will have to pay redress to customers if they are negatively affected by their renewal quote, but the industry as a whole gave a sigh of relief that the FCA refrained from imposing fines on firms for past price walking.