Insuring loyalty – how devoted customers might stop being punished

Jamie Talmage explores why plans to ban insurers from overcharging loyal customers will be welcomed by many.

The author(s)

  • Jamie Talmage Market Strategy & Understanding
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What’s the most annoying thing a company can do to a customer? Unsolicited sales calls? Rude or condescending staff? Long queues? How about actively punishing customers with higher fees if they stay loyal for more than a year? Surely no company would be foolish enough to do this, and even if they did, customers in today’s internet society would quickly cotton on and switch to another company, wouldn’t they?

Err… no. Alas, in reality this is not the case. From broadband to banking to energy, companies to varying degrees continue to make money by gradually increasing prices to loyal customers, who for various reasons (but commonly just inertia) are reluctant to switch. At the same time, they charge low introductory prices to new customers to attract them in the hope they forget to switch when the introductory price comes to an end.

Insurance bad boys

One of the most blatant and widespread exponents of this loyalty penalty is the insurance sector, particularly home and motor insurers. Here, companies exploit their customers’ tendency to stick with the status quo to such an extent that the FCA recently estimated that six million customers are paying over the odds to the tune of £1.2bn.

Given this scale, and after years of disquiet from consumer groups, the FCA has finally decided to act. The watchdog recently announced plans to outlaw the loyalty penalty in home and motor insurance altogether as part of a wide-reaching review of the insurance sector. Although still only at draft stage, a ban on the loyalty penalty is likely to be implemented within 18 months.

Consequently, insurers will probably soon have to offer existing customers a renewal price that's no higher than they would offer a new customer using the same sales channel. If an insurer wants to increase prices for its existing customers at renewal, it will also need to increase prices for its new customers.

Haggling merry-go-around

From a customer point of view these plans will be welcomed. We recently asked a select group of customers via our Ipsos Money Talks panel their views on loyalty within the general insurance market. The responses we received were overwhelmingly negative, and with a strong sense of mistrust. There was also a desire for insurers to provide customers with their ‘best price first time’, with many resenting the need to haggle each year to receive discounts.

These findings chime with data we collect from our Financial Research Survey (FRS), where customer satisfaction levels across home and motor insurance have fallen steadily over the last six months.

Overall, these changes could fundamentally change the market. For insurers greater focus will need to be placed on retaining customers rather than just winning new ones.

For customers being loyal may finally pay.

The author(s)

  • Jamie Talmage Market Strategy & Understanding

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