What's the point in being loyal to your insurer?

After some three years, the Central Bank has finally taken action on price discrimination across the consumer insurance market. The move means that loyal insurance consumers should no longer end up paying considerably over the odds for their insurance cover when compared with those who switch each year.

They will likely still pay more, however. Yes, while the market will change from July of this year, the best deals will remain for those who shop around and switch each year.

So what are the changes and how will they actually impact on Irish consumers?

Background

Price differentials in the insurance sector first became a headline issue back in 2019 when the then government asked the Competition and Consumer Protection Commission (CCPC) to look into the practice. Subsequently, the Central Bank considered it, with an initial report finding that dual pricing across the home and car insurance sectors was more common than expected.

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A letter was issued from the regulator to the chief executives of the various insurance companies asking them to “understand fully the impact of pricing practices” on their customers.

Then there was an interim report, followed, last summer, by a report which ruled that price walking – also known as the loyalty penalty or dual pricing – was damaging, and called for its abolition.

Now, in mid-March, the regulator has introduced new rules which, it says, will protect home and insurance customers. Central Bank director general of financial conduct Derville Rowland said the new regulations "will significantly enhance the consumer protection framework".

Ban on price walking

One of the major changes announced by the regulator is a ban on so-called price walking across the sale of motor and home insurance. This follows its review in which it found that the practice could result in unfair outcomes for some consumers in the motor and home insurance markets.

Price walking is where consumers are charged higher premiums, relative to the expected cost, the longer they remain with an insurance provider.

In practice, it means that after years of staying with the same insurer, one customer’s policy might be 30 per cent more expensive than that of a new customer – even if the risk profile is exactly the same.

A report from the Central Bank last summer found that customers who stayed with the same car insurer for nine years or more ended up paying 14 per cent more than a driver renewing for the first time.

And in home insurance, the difference was even greater, averaging 32 per cent.

This has a significant impact considering that Irish insurance consumers tend to be loyal. The Central Bank report also found that new business customers have a renewal rate of 60 per cent and 68 per cent for private car and home insurance, respectively.

From July 1st, the new rules mean insurance providers won’t be able to charge existing customers a higher premium on renewal than any other customers, with the same risk profile, who have been with the insurer for a year or more. It will only impact on policies taken out after this date, not ones that may already be in force on this date.

In addition, to ensure “sound practices”, insurers and brokers will need to carry out an annual review of motor and home insurance pricing policies, to ensure they are compliant with the regulations. The first review should be completed by the end of February 2023.

Discounts still possible

The new rules don’t mean that incentives for new customers can no longer be offered, however. “To support competition and switching, new customer discounts will be allowed,” the regulator said.

This is unlike the UK, where, from the start of this year, insurers have been effectively prohibited from offering below-cost discounts to attract new customers. The Financial Conduct Authority has taken action to ensure that insurers have to offer renewing customers a price that is no higher than what they would pay as a new customer.

Explaining the approach not to ban so-called dual pricing, Ms Rowland argued that there can be “significant value” attached to discounts for new customers, such as discounts for younger drivers.

Daragh Cassidy, head of communications with Bonkers.ie, has welcomed the move from the Central Bank, including the fact that new customer discounts will continue to be allowed.

“Had dual pricing or new customer discounts been banned, there was a concern that consumers who were savvy and took the time to search for better value each year would have been penalised,” he says. “Banning new customer discounts could also have had a detrimental effect on competition.”

Insurance Ireland's director of regulation and policy development, Jacqueline Thornton, also says that the regulator's approach is "balanced and pragmatic".

“By retaining the ability for new customer discounts to be applied, it’ll keep the opportunity for more savvy consumers to shop around,” she says.

The new rules were also welcomed by Sinn Féin's spokesperson on finance Pearse Doherty, who campaigned for the changes. He said they will "increase transparency and result in fairer pricing for consumers".

However, not all have welcomed this decision.

Cathie Shannon, director of general insurance at Brokers Ireland, which represents 1,250 broker firms, said that, given the Central Bank's consumer protection mandate, the association had hoped that it would "ban all unjustified price differentials, not just those impacting customers as a result of length of tenure".

In practice, while the regulator’s approach is understandable as a means of trying to boost and retain competition, it does compromise the overall impact perhaps.

After all, on the one hand, insurers are being told you can’t charge existing, loyal customers more. But on the other, by being able to offer discounts, they will still be charging existing customers more, as they won’t be benefiting from the discounts offered to new customers and will have to cover the cost of the below-cost incentives.

Automatic renewal

There has also been a change when it comes to the automatic renewal process. Consumers will soon get information ahead of the automatic renewal of their policy, including the right to cancellation.

“This will help you make more informed decisions when renewing your insurance, and prompt you to consider if your insurance policy continues to serve your needs and whether you should think about switching to another provider,” the regulator said.

However, it is a watering-down of a previous proposal. The Central Bank had initially indicated that it would require insurers to ask customers to opt in to their policy being renewed automatically after a year. It has now pressed pause on this decision, saying it needs time for further consideration “to avoid the risk of any unintended consequences, including any scenarios that might lead to consumers finding themselves without critical insurance cover”.

Thornton agrees that the actual impact on consumers “does need to be investigated a lot more”, but notes that if consumers are concerned about automatic renewal, they can already request that their policies are not renewed automatically.

The Central Bank says insurers won’t have to be compliant with the automatic renewal requirements until October 1st, due to the challenges it may present “with system, process and documentation changes”.

Impact on consumers

So, you may well ask, what’s this going to mean to me, the consumer? Well firstly, older customers, who are often more loyal and more reluctant to switch, will fare better. Whether they are with an insurer for five years or 25 years, they must be charged the same price as all other existing customers.

However, where dual pricing will continue to exist is with regards to new customers, as insurers will be allowed to offer discounts to attract new business. This means that the best deals will continue to be those for people who shop around and are willing to switch on a regular basis.

For Cassidy, the move is “a good compromise between protecting older and more vulnerable customers, who may not have the skills and tools available to switch insurer easily, and protecting the rights of those who like to be able to switch and save money every year”.

The message then is that while you may no longer be penalised as much as you were previously for being a loyal customer, insurance will continue to be cheapest if you shop around – and switch – regularly.

“It is clear more than ever that it is a wise move for consumers to shop around at renewal time for home and motor insurance policies, to ensure they achieve best value,” advises Shannon.

And remember, a ban on price walking is not the same thing as a ban on premium increases. As Thornton notes: “It doesn’t necessarily mean your policy won’t go up.”

Indeed, where there is a change to your risk profile, or other factors that affect the cost of your premium, prices can rise.

What’s next?

According to the regulator, the new regulations do not mark the end of its efforts in the insurance market.

“We will continue to engage with insurance providers to ensure work in relation to oversight of pricing practices is undertaken,” Ms Rowland said, adding that the Central Bank will monitor developments in the private motor and home insurance markets to “better understand customer engagement in the market and how it might be improved, and to ensure that firms are acting in the best interest of consumers and delivering fair outcomes”.

But could there be scope for a broader review of differential pricing across the Irish financial services market?

A spokeswoman for the regulator says it "does not currently have plans to extend the ban on price walking to other insurance products", noting that the new regulations apply only to motor and home insurance because "of their importance to consumers, and to society more generally". In addition, they are renewed annually, unlike, for example, mortgage protection where the price is fixed for the life of the product and, as such, price walking cannot occur.

That’s not to say that it wouldn’t make sense to do so.

In the mortgage market, for example, loyal customers lose out on the cashback payments enjoyed by new customers (competing on lower rates would benefit all customers equally).

And in health insurance, customers who may be on certain policies for many years often lose out considerably. This is because such policies are no longer typically marketed to new customers, as they have been replaced by more attractive offerings. Consider the VHI's Plan B, a once-popular mid-range policy. It was renamed HealthPlus Access back in 2011, and now costs €2,238 a year.