Pay­ing a heavy price for fi­nan­cial loy­alty

Yorkshire Post - - MONEY -

IF THERE’S one is­sue that makes my blood boil, it’s the high charge that con­sumers face for loy­alty in fi­nan­cial ser­vices.

Those who trust that their sav­ings or in­sur­ance provider is do­ing the right thing by them when they keep their cus­tom with a com­pany are rou­tinely kicked in the face and pe­nalised for hav­ing the temer­ity to not shop around and switch to an­other firm.

This is most per­ni­cious in the in­sur­ance mar­ket – ear­lier this year, Which? re­search found that loyal home in­sur­ance cus­tomers pay over a third more than new cus­tomers, a year– mean­ing that re­new­ing your pol­icy with the same in­surer could cost you dearly.

On av­er­age, peo­ple who had been with their in­surer for more than a year paid £75 more than new cus­tomers for com­bined con­tents and build­ings in­sur­ance poli­cies.

Which? sur­veyed mem­bers of the gen­eral pub­lic who held a home in­sur­ance pol­icy, ask­ing them how long they had been with their provider and how much they’d paid this year.

Of the 5,592 own­ers of build­ings and con­tents (com­bined) poli­cies in the sur­vey who told us what they were pay­ing, new cus­tomers were be­ing charged an av­er­age premium of £195. By com­par­i­son, those who had been with the in­surer for one to two years paid an av­er­age of £220 – and if they’d stuck around for four to six years, the av­er­age was £300.

In­deed, I’ve heard from countless peo­ple who have stuck with an in­surer for five years or more, only to find that they are be­ing over­charged to the tune of hun­dreds, some­times thou­sands, of pounds.

One Which? mem­ber had been with the same in­surer for eight years and was pay­ing £554 a year for her home in­sur­ance. When she looked on a price com­par­i­son site, she saw ex­actly the same pol­icy from the same in­surer with a ‘new cus­tomer’ price of £335.28. To get a £218 sav­ing, she had to can­cel her pol­icy and reap­ply for the new cus­tomer dis­count – just to avoid the on­go­ing rip-off she was fac­ing.

Thank­fully, oth­ers share my ire – Cit­i­zens Ad­vice launched a ‘su­per-com­plaint’ and the reg­u­la­tor is now bar­ing its teeth. Last week, the Fi­nan­cial Con­duct Au­thor­ity pub­lished a scathing re­port on home in­sur­ers’ pric­ing prac­tices – high­light­ing se­ri­ous con­cerns about whether con­sumers are be­ing fairly treated.

As a pre­lim­i­nary step to a broader in­sur­ance in­ves­ti­ga­tion, the watch­dog re­viewed the ap­proaches to pric­ing and stor­age of cus­tomer data of 18 home in­sur­ance firms, rep­re­sent­ing around 40 per cent of the home in­sur­ance mar­ket in the UK.

In­sur­ers got a shel­lack­ing from the reg­u­la­tor. The FCA re­ported a num­ber of key ar­eas pre­sent­ing “the most po­ten­tial for sig­nif­i­cant harm and poor out­comes for con­sumers”.

Th­ese in­cluded prob­lems caused by ‘dif­fer­en­tial’ or ‘dual’ pric­ing – the prac­tice of charg­ing cus­tomers with the same or very sim­i­lar risk char­ac­ter­is­tics dif­fer­ent prices for the same prod­uct.

One ex­am­ple of this is charg­ing new cus­tomers dif­fer­ent rates to ex­ist­ing ones. The FCA’s re­search found some groups of con­sumers pay sig­nif­i­cantly higher prices than other groups with sim­i­lar risks and costs.

Cus­tomer loy­alty has a huge im­pact on in­sur­ers’ mar­gins. Look­ing at the home in­sur­ance mar­ket, the FCA found that in­sur­ers make next to noth­ing when peo­ple buy their in­sur­ance pol­icy, but the longer a cus­tomer stays, the more they are milked for. The av­er­age mar­gin on a cus­tomer that’s been with an in­surer for a decade or more is al­most 40 per cent.

This is the con­se­quence of how the mar­ket for buy­ing in­sur­ance works. In­sur­ers hack down their prices to get to the top of price com­par­i­son site ta­bles and win new cus­tomers, and then scram­ble to re­coup that in­vest­ment by jack­ing up pre­mi­ums in sub­se­quent years. What’s per­verse is that the FCA found this con­tin­ues long af­ter that money is re­couped af­ter the sec­ond or third year, mean­ing the longer you stay, the more your pre­mi­ums go up.

And it found that in­sur­ers weren’t con­duct­ing over­sight of their pric­ing prac­tices and ac­tiv­i­ties, so they couldn’t ‘re­li­ably as­sess’ and pro­vide ev­i­dence whether they were ac­tu­ally treat­ing their cus­tomers fairly.

This re­view is long over­due. For years, loyal pol­i­cy­hold­ers have been ex­ploited by in­sur­ance providers, pun­ished by ex­ces­sive pre­mi­ums, and have had to bat­tle with un­clear pric­ing that makes it dif­fi­cult for peo­ple to un­der­stand whether or not they’re get­ting a fair deal.

Cus­tomers who pre­fer to stay with one provider are at risk of be­ing hit with vastly over­priced pre­mi­ums when lit­tle has changed in the ser­vice they re­ceive.

It’s ab­so­lutely right that the reg­u­la­tor tack­les this sec­tor to en­sure cus­tomers aren’t pun­ished for their loy­alty and that pric­ing is clear and trans­par­ent across the in­dus­try.

The FCA has pro­duced a scathing re­port on home in­sur­ers’ pric­ing prac­tices.

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