The End of the Loyalty Penalty: All you need to know

In late 2020, the Financial Conduct Authority announced its intention to ban the ‘loyalty penalty’ which applies to home and car insurance. According to the body, this change will save customers a whopping £3.7 billion over the next decade.

Simon England, the managing director of insurance provider ALA, expressed his relief at the announcement. “As part of a historic review the FCA found that a large proportion of car buyers were being severely overcharged for GAP cover, premiums being added onto customer purchases without their knowledge, being told they couldn’t buy it from anywhere else and were generally given poor service. Essentially the practices were not dissimilar to the misselling issues which occurred with PPI.”

What is loyalty pricing?

Loyalty pricing is a discriminatory form of pricing for insurance policies, whereby new customers are offered a cheaper premium than existing ones in the same situation. It’s through this practice that providers are able to compete on price comparison sites. Since a lot of customers are unwilling to go through the hassle of making a switch, or of negotiating a cheaper premium, the 

Why is the FCA banning?

The FCA’s research determined that, in 2018, around six million policyholders were collectively paying around £1.2bn more than they otherwise might have. Which? Magazine found similar effects, with existing customers, on average, paying around 20% more than new ones. This effect tends to accumulate over many years: in extreme cases, the magazine found that the most loyal customers end up paying an incredible 75% more than those who’d recently switched?


How will customers benefit?

At present, customers are forced with a choice between three unappealing alternatives. They can bite the bullet every year and put up with inflated premiums. They can spend their time trawling through comparison sites. Or they can spend it phoning their existing provider, to be put on hold, in exchange for a discount whose size is difficult to predict.

An improvement in regulation here would not only put large amounts of money back into the consumer’s pocket, but also help to remove the cognitive load and stress that tends to come up as the date of renewal draws near.

How will this affect service providers?

These changes will obviously affect the business model of many insurance providers, forcing them to provide value to customers who’ve been with them for longer. Companies may also be compelled to publish the different prices that customers pay, which would further empower consumers to make the right decisions about their spending. The FCA might also ultimately ban the practice of auto-renewing. This latter step could prove more contentious, as many time-poor customers might not notice that their insurance has lapsed.

The rules are set to come into effect later this year.