This year, for the first time, I was offered a lower premium to renew my car insurance than my insurer charged when I moved to them. I’m used to getting a renewal quote around 20 per cent higher than I paid the first time, which means I always switch. This offer was almost 13 per cent lower.
Insurers have tended to penalise those who don’t switch car or house insurance every year by pushing up their premiums. The companies then spend this extra income on cut-price offers to win new customers like me. Those who shop around get a tasty offer. The majority who don’t are milked.
My experience shows that’s changing, thanks to new rules that ban price-walking—the practice of penalising loyal (or passive) customers by charging them more than newcomers. Instead, my renewal quote must now be the same as I would have been offered if I were a new customer. This is good—and I say that as someone who has benefited for years from cheap deals subsidised by other people.
Our insurance premiums should reflect the risk we pose, not whether we are loyal or flighty. The old system was bad for everyone except the small minority, like me, who changed every year. Other customers paid too much, and it cost insurance companies a lot as well. The Financial Conduct Authority has suggested they have been overcharging loyal customers by £1.2bn a year, while shelling out £2.3bn a year to attract switchers. On that basis, regulators have done them a favour by ending a sharky but costly practice that no single company could afford to abandon unilaterally.
The new rules will bring some pain for insurers because they will have to cut prices for longer-standing customers who renew, to bring them in line with what they would be quoted if they were joining now. Against that, prices for new customers will rise because they can no longer be subsidised by existing policyholders. I expect the industry’s profits to come out level or slightly higher once this happens.
Overall, the change looks like a net benefit for consumers, the industry and its investors. It seems less risky to me to invest in companies that compete on their skill in assessing insurance risk—which we can judge by looking at their underwriting profits—and their efficiency, rather than on the odds of them winning the price-cutting equivalent of a Mexican standoff.
