The biggest shake-up to the insurance industry for decades takes place on Saturday, when insurers will be banned from quoting policyholders a higher price to renew their home or motor insurance than they would offer a new customer.
After years of complaints that customers who regularly switched insurer were paying significantly lower premiums than those who renewed, the Financial Conduct Authority (FCA) has said they must be offered the same price.
The move is expected to be bad news for households that chase the lowest new-customer premiums annually.
However, the FCA expects it to result in lower renewals for loyal customers who renew automatically, typically saving them £120 a year each.
The FCA’s reforms follow a review that found insurers were attracting new customers with artificially low prices and then increasing premiums in subsequent years – a practice known in the trade as “price walking”.
It also uncovered evidence that insurers were using sophisticated processes to attract customers who they thought were less likely to switch in future.
As well as leading to higher prices for loyal – often older – customers who were less likely to switch suppliers, price walking had distorted the way the whole insurance market had worked, the FCA said.
It has been particularly prevalent in the home insurance market where those renewing policies have routinely been charged double or even triple what they would have paid as a new customer of the same firm.
Sheldon Mills, executive director of consumers and competition at the FCA, said the rules were expected to save consumers £4.2bn over the next 10 years.
“Our interventions will make the insurance market fairer and make it work better. Insurers can no longer penalise consumers who stay with them. You can still shop around and negotiate a better deal, but you won’t have to switch just to avoid being charged a loyalty premium,” he said.
“We are keeping a close eye on how insurers respond to our new rules, to ensure that the benefits of a better insurance market are delivered to consumers.”
Martin Lewis, the founder of the MoneySavingExpert website, and one of those who helped to turn UK consumers into a nation of switchers, has predicted that price savings currently offered to regular switchers will fall.
“My best guess is firms won’t just cut renewal prices to match those for newbies. Rates will meet nearer the middle as happened in 2012, when insurers were barred from gender price discrimination. This will mean savings from switching will likely relatively reduce. We’re still unsure of how this will work exactly, but prices for switchers are very likely to be relatively higher for January,” he said.
The move has been welcomed by the Association of British Insurers, which said it will remove “excessive price differences in the premiums paid by some new and existing customers for the same policy”.
Ursula Gibbs, director at the comparison website Comparethemarket.com, said it looked as though insurers had been playing “a clever pricing game” and keeping premiums lower in recent months to try to lock in as many customers as possible before new regulations were introduced.
She said car insurance premiums had fallen by £80 a year over the past 12 months.
“There is uncertainty over what will happen to the cost of car insurance next month. While the rule changes should end the loyalty penalty, this does not mean that auto-renewing your insurance will get you the best deal,” she said.
If the FCA’s new rules do result in less switching, it will bad news for the comparison websites, coming at a time that the energy switching market has all but ceased to exist. The sites earn a considerable commission for each new customer they bring to an insurer.
