Home Insurance – Winner or Loser?

marathon winner

Are you a ‘winner’ or ‘loser’ in the Home Insurance ‘game’ for fair pricing?

Winners: Examples of consumer groups who get the best deals.

  • Private renters with children,
  • People with low credit scores,
  • Unemployed renters,
  • Customes for contents only insurance.

According to the Financial Conduct Authority, these groups of consumers are also most likely to shop around.

Losers: People renewing their policies are most likely to be losers and include:

  • People over 65 years old,
  • Customers who pay monthly,
  • People who auto-renew,
  • Those who have made previous claims
  • Customers taking out buildings only insurance.

Where does this table come from?

Around 40% of the UK home insurance market insurance pricing data was reviewed by the Financial Conduct Authority.

Guess what – loyal customers risk getting ripped off!

Key insurer pricing tactics were:

  • Price walking – loyal customers get charged more each year without justification.
  • Risk bias – lower risk customers who get over-charged.
  • Incentives for new customers – our blog on incentives.

How do we know this is happening?

The graph below illustrates 2016 information on the amount of money made, the margin, on a policy (thin red line) against the length of time a customer stays with a company.

house insurance premiums over renewals

The people who stay with a company for over 10 years – the ‘cash cows’ – pay 40% margins ABOVE average cost, while new customers can pay 40% BELOW the average.

This appears to indicate cross-subsidisation occurring from loyal customers to new customers.

The winners and losers study was based solely on the core home insurance product, and does not consider any money made from:

  • Related sales (add-on insurances) and a ’fixed price’ can be very profitable for the insurer.
  • Credit costs for premium payments can be very high and may be more expensive than using a credit card!
  • Subsequent fees and charges – changing a name or a detail can be free or very expensive (say £25 per change) depending on the firm.

Even with new rules, some other loopholes have been closed which could otherwise encourage ‘bad behaviour’ from firms and they stop new customer incentives which are not replicated for renewal customers!

What is changing?

The rule changes include:

  • Retail vouchers can still be offered as an incentive for new and renewal customers but the value of the vouchers must not reduce over time.
  • Cash or cash-equivalent offers to new customers must be offered to existing at renewal as well.
  • An existing customer who actively buys a policy with the same firm through a different channel or distribution arrangement, must be treated as new customer.
  • If your insurer transfers you to a different policy (of a similar type) then they should treat this as a renewal .

These changes will help prevent consumer harm from price walking resulting from incentives offered by insurers or brokers.

The FCA believe that these new rules will improve fair pricing and:

  1. Prevent firms from increasing prices at renewal.
  2. Reduce the time and cost to customers in searching and switching to avoid higher renewal prices because of price walking.
  3. Reduce marketing bias to attract highly profitable long-term customers.
  4. Increase competition by providing fair value at the outset and throughout a customer’s relationship with the Firm.
  5. Increase price transparency and build consumer trust.

These rules come into effect on 1 January 2022.

Pricing practices in the retail general insurance sector: Household insurance (fca.org.uk)