(Sharecast News) - UK insurance companies will be forced to stop ripping off loyal customers and offer premiums at the same rate as new clients under changes proposed by the regulator.
The Financial Conduct Authority announced the new rules on Tuesday after research found six million policyholders were paying high or very high margins in 2018 and if they had paid the average for their risk they would have saved £1.2bn.
It highlighted examples of the practice, known as "price walking", where new customers paid £285 for motor insurance while those who have been with their provider for more than five years paid £370.
New customers for buildings insurance paid £130 while loyal clients who had been with their provider for more than five years paid £238.
Shares in major insurers all fell on the news, as did price comparison and switching website Moneysupermarket.com.
"The FCA estimates that its proposals will save consumers £3.7bn over 10 years," said Christopher Woolard, the regulator's interim chief executive.
He added that the proposal meant that when a customer renews a home or motor insurance policy, they pay no more than they would if they were new to their provider through the same sales channel. For example, if a customer bought the policy online, they would be charged the same price as a new customer buying online.
The FCA has taken a tough line with the industry during the coronavirus pandemic, monitoring closely the way insurers have handled claims. Tuesday's decision comes after years of complaints about how customers have been punished with hefty annual premium rises for being loyal.
Last week the FCA successfully brought a test case over business interruption insurance, where clients had claims rejected for loss of business during the Covid-19 lockdown despite having the appropriate cover.
The Association of British Insurers said it agreed 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."
However, Sarah Coles, personal finance analyst at Hargreaves Lansdown said committed switchers "may end up paying the price".
"The FCA is stepping in to protect loyal insurance customers from the great renewal rip off. At the moment, the industry is specifically designed to fleece people who don't switch," Coles said.
However, if you're a committed switcher, you're likely to end up paying more. At the moment, insurers offer far better deals for new customers. The new rules would put a stop to this overnight.
The best way to mitigate this change is to switch each year to the most competitive provider for your risk profile. Unfortunately, this means switchers putting just as much time and energy into hunting out the best deals - for less reward."
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