Gareth Shaw: Financial loyalty could be costing you a fortune

If there's one issue that makes my blood boil, it's the high charge that consumers face for loyalty in financial services.

Unless you have money to burn, renewing your policy every year youre likely to pay far more for your deal than the same company is offering to new customers. Picture: Jon Savage

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.

Sign up to our Opinion newsletter

Sign up to our Opinion newsletter

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 – Citizen 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 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.

Gareth Shaw is head of Which? Money online