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Berkshire Hathaway Specialty Insurance

FCA set to ban insurance 'loyalty penalties'

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Insurers would be banned from pricing practices that disadvantage renewal customers compared to first-time purchasers under changes proposed by the UK Financial Conduct Authority (FCA).

The rules would require that a customer renewing their home or motor insurance pays no more than they would if they were new to the provider through the same sales channel.

Firms would be free to set new business prices, but would be prevented from gradually increasing the renewals to consumers over time, in a practice known as “price walking”, other than in line with changes in risk.

FCA also proposes new data reporting requirements, so it can check rules are being followed, and making it simpler to stop automatic renewals. It says changes would also make sure firms have processes in place to deliver products that offer fair value to customers.

“We are consulting on a radical package that would ensure firms cannot charge renewing customers more than new customers in future, and put an end to the very high prices paid by some long-standing customers,” Interim CEO Christopher Woolard said overnight.

An interim report released by the FCA last year estimated millions of people were paying £1.2 billion ($2.1 billion) a year more as a result of pricing arrangements.

“Firms use complex and opaque pricing practices that would allow them to raise prices for consumers that renew with them year-on-year,” the final report says.

UK market and data analysis firm Consumer Intelligence says home insurance premiums are rising 12.67% at renewal while in motor they are gaining 2.54%, with the industry “hooked" on introductory pricing.

“Today’s ruling from the FCA requires firms to go cold turkey, completely eradicating the practice of introductory pricing and the loyalty penalty,” it said. “This could be considered a win for consumers, and more so for vulnerable customers.”

Association of British Insurers Director General Huw Evans says insurers and brokers have started to tackle the issue, while the FCA has confirmed insurers have not made excessive profits, with winners and losers from the way the market works currently.

“It is vital that price comparison websites and insurance brokers are subject to the same level of supervision and monitoring by the FCA to ensure a balanced approach,” he said. “We will consider this package of proposals, so that we can engage with the FCA on the most effective measures possible.”

The Insurance Council of Australia (ICA) says it is willing to look at concerns about whether policyholders are getting the best overall outcome, but considers the FCA’s announcement is only relevant to the UK market.

“ICA, and its members, believes discounts for new customers is competition in action,” spokesman Campbell Fuller told today.

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

The customer acquisition strategies are common in many industries, including energy retailing and telecommunications, ICA says, while there are also a range of other reasons why premiums may differ between new policies and renewals.

FCA has sought comments on its proposals by January 25 and expects new rules would come into effect four months after publication of its policy statement.

The consultation paper is available here.