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Insurers ‘entitled’ to discount new business, but for how long?

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A consumer recently complained to the Australian Financial Complaints Authority (AFCA) that his premium had soared by 47%, and he could get a cheaper quote as a new customer from the same insurer.

He was given short shrift.

AFCA notes that in Australia “it is not uncommon for financial firms to make special offers of reduced premiums or packages to attract new customers”.

“The insurer is entitled to the commercial liberty of applying different rating factors when offering new business online insurance quotes,” the ombudsman said.

“I am of the opinion the complainant’s reference to and reliance on this online quote for new business does not assist his position.”

But how much longer will insurers be afforded this “entitlement”?

As previously reported by, UK regulators are cracking down hard on so-called “loyalty taxes”.

Under “radical” changes proposed by the Financial Conduct Authority (FCA), insurers would be banned from pricing practices that disadvantage renewal customers compared to first-time purchasers.

The FCA says insurers target customers that are unlikely to switch to a competitor and gradually increase premiums in a process known as “price walking”. It says high acquisition costs are also passed on to consumers, making products more expensive than they need to be.

It’s not hard to understand the FCA’s logic. Surely customer loyalty should be rewarded – especially in insurance when you consider the many consumers who’ve paid premiums year after year and never made a claim.

Australian insurers don’t see it that way. The Insurance Council of Australia (ICA) says new customer discounts are “competition in action”, and insurance is far from the only industry to engage in such tactics.

“New customer discounting encourages consumers to compare the value of products in the market and increases the affordability of insurance for some customers,” ICA says.

Aside from former NSW Emergency Services Levy Monitor Allan Fels, who prepared several papers on the issue during his tenure and estimates the “loyalty tax” at 34%, regulators here haven’t yet taken up the mantle. But that doesn’t mean they won’t.

In a recent paper actuarial firm Finity warns “it is entirely plausible that a similar regulatory focus could arise here in the future”.

Finity Principal and author of the paper Ashish Ahluwalia told that regulators in the UK and Australia “seem to swap notes and share initiatives”.

While the issue is more pronounced in the UK due to intense personal lines competition across comparison sites – plus AFCA’s recent comments would “give Australian insurers confidence” – Mr Ahluwalia warns they should take nothing for granted.

“The issue does seem to have taken a back seat here, but you never know. It was a surprise to UK insurers that the FCA went as far as it did.

“It is better to be in an informed position to put your point of view forward.”

The Finity paper says Australian personal lines insurers should at least be discussing the UK changes and considering their own pricing practices.

“We think that the issue represents an example of a ‘non-financial risk’, carrying downstream financial risks, that companies should be giving some regard,” it says.

“This would include reviewing the current state of portfolio pricing to understand consistency with the potential future operating environment.

“For example, to understand if there are systematic discrepancies between renewal and new business pricing.”

Click here to read the Finity paper.