Home and car owners are set to save hundreds of pounds on their insurance policies under proposals to ban companies from overcharging loyal customers.
The City watchdog criticised insurers that use “complex and opaque” pricing and told them that existing customers who renew their home or motor cover should pay the same as new customers.
Insurance firms have been exposed for hiking up the prices of cover for loyal customers and charging renewal fees while offering better deals to those who switch.
The practice, known as “price walking”, is common across the industry but consumer groups say it amounts to a rip-off and that the cost of insurance should be based on risk.
Up to 10 million car and home insurance policy holders have been with their insurer for five years or more and the Financial Conduct Authority calculates that 6 million people are paying about £200 too much, or £1.2bn in total, per year.
On Tuesday, the FCA unveiled a range of new proposals aimed at shaking up the market and giving customers a better deal. The regulator estimates the changes could save policyholders £3.7bn over 10 years.
A new customer for buildings and contents insurance typically pays £130 for a year’s cover, but if they stay with the same company for five years it would cost them £238, on average, the FCA said.
Christopher Woolard, interim chief executive of the FCA, said: “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.”
The new rules would mean that anyone renewing their home or car insurance policy would be offered the same price as a new customer, if they are buying through the same “sales channel”, such as the internet, for example.
Insurers can still offer different prices online or over the phone but customers old and new must be able to get equivalent deals.
The FCA is seeking views on its proposals by 25 January 2021.
Dame Gillian Guy, chief executive of Citizens Advice, said: “It’s nearly two years since we submitted a super-complaint on the loyalty penalty and we’re pleased to see the FCA is proposing strong action to crack down on this systematic scam.
“We’re especially happy to see it tackling price walking – gradual year-on-year price increases – and making companies automatically switch their customers to better deals.
“It’s important to remember these are proposals and have an introduction date of 2022 which is a long way away. It is essential that the FCA confirm and implement these quickly to bring insurance customers’ prices down by £370m a year.”
Huw Evans, director general of the Association of British Insurers (ABI), said: “The ABI agrees with the FCA that the household and motor insurance markets do not work as well as they should for all customers, and we continue to support the FCA’s work to address this.
“Insurers and brokers have already begun to tackle the issue of excessive price differences between new and existing customers through an industry initiative that has seen over 8.5 million pricing interventions across home and motor insurance worth £641m.
“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.”