It’s not often that good news comes out of the bowels of the Financial Conduct Authority’s spanking new offices in deepest Stratford, East London. Indeed, sometimes I wonder if anyone works there, given the financial watchdog’s inability to do anything faster than a snail’s pace. Just think of fallen investment star Neil Woodford – fund suspended in June 2019, FCA investigation launched, then silence of the regulators.
But the day before New Year’s Eve, just as most people had resigned themselves to yet another night spent in celebrating the start of yet another new year, the City regulator did something unusual. It came out with some good news – and blew its own trumpet harder than any professional trumpeter could do.
Over the next ten years, it confidently predicted, consumers would save more than £4billion in insurance premiums as a result of new rules it was introducing to govern the selling of motor and home insurance.
In safe hands: A loyalty premium is where insurance companies charge loyal customers a higher price for renewing their insurance than they would pay if they were a new customer
‘Our interventions will make the insurance market fairer and make it work better,’ chirped the regulator’s executive director for consumers and competition.
For the record, if a company regulated by the FCA made similar boastful claims about the savings or investment returns it could make or generate for customers over the next ten years, I’m sure the regulator would not be impressed.
One rule for those who rule, another for those who are ruled. But that’s by the by.
The £4.2billion it says its actions are expected to save consumers are a result of a banning of the loyalty premium – the practice where insurance companies charge loyal customers a higher price for renewing their home or motor insurance than they would pay if they were a new customer.
It’s a despicable practice which The Mail on Sunday exposed more than four years ago as part of a ‘broken loyalty’ special investigation over many weeks.
Our work prompted charity Citizens Advice to lodge a ‘super-complaint’ with the Competition and Markets Authority, calling for the regulator to bring to an end the persistent practice of companies penalising loyalty – across many markets, not just home and car insurance.
The FCA’s new rules are a direct result of Citizens Advice’s actions. So hats off to the charity – it does sterling work, much of it understated and low key.
Of course, we welcome any regulatory intervention that produces better financial outcomes for consumers, especially for those who are elderly and were brought up to believe that their bank and insurer would always do the best for them.
As Citizens Advice’s research revealed, it’s the elderly, the vulnerable, who fall foul of the loyalty premium the most.
Yet, can we believe that the new rules will lead to a new brave insurance world where all customers are treated fairly? And will the regulator back its boasts by policing the market effectively?
Sheldon Mills, the aforementioned FCA’s director for consumers and competition, thinks so. ‘We are keeping a close eye on how insurers respond to our new rules,’ he says. Fine words, but only time will tell if the regulator is true to its word.
How it will police the market is anyone’s guess. Apparently, according to Ian Hughes, founder of general insurance consultant Consumer Intelligence, the regulator has been busy recruiting data scientists.
Their job will be to pore over data supplied by the insurers – and to identify those that are not playing fair by the rules.
Those not championing customers, but striving to generate more profits for their shareholders, will be held to account. ‘The fines won’t be small,’ says Hughes in a blog published last week, ‘they will be large.’
There are some who believe the data scientists will have their work cut out. Among them is James Daley of Fairer Finance.
Like Hughes, Daley has an intimate understanding of how the insurance market works. His view is that it will be nigh on impossible for the regulator to ensure new and existing customers get the same price for the same cover from the same provider.
Even if abuses are discovered, he argues that the wheels of regulation turn so slowly that insurers will not be instantly held to account. The old ways may well persist in insurance enclaves long into 2022.
As for consumers, they will have to make a big leap of faith – that their renewal premium will actually be the same as a new customer would get.
Daley believes that the insurance industry employs too many clever people to let the regulator change their ways and suppress their profits. Any loss of revenue from the removal of the loyalty premium will be compensated for elsewhere – by higher policy excesses, chipping away at people’s cover, more policy restrictions and fees. In other words, a hollowing-out of cover and, of course, higher premiums. Although the new regime is still in its infancy, there’s alarming evidence emerging that premium increases on motor and home cover could well jump this year – possibly by as much as 30 per cent across the board. ‘Double-digit, almost certainly,’ says Hughes.
One work colleague whose home buildings and contents insurance cover renewed just before the new rules came in saw his annual premium increase by a staggering 37.5 per cent. No claims had been made in the previous year. When he confronted the insurer, he was told that the price increase had been decided by its underwriters.
When he tried to get a quote as a new customer to see whether he was a loyalty premium victim, he couldn’t get one because his insurer wouldn’t quote for someone with existing cover.
Interestingly, his insurer gave him – without explanation – a 7.5 per cent discount on his new premium, presumably because he had challenged them.
Nice, but that would surely be a rule breaker now.
The price hike that my colleague has had to take on the chin looks like it could become the norm. According to Hughes, there is a real danger of a consumer backlash, especially among people who see a large jump in their premiums with their existing insurer, would like to switch, but can’t get a cheaper price elsewhere. ‘They become rate-trapped,’ says Hughes, ‘making them irritated and disloyal.’
Of course, it’s still early days, but it looks as if the regulator’s intervention in the insurance market could well cost policyholders dearly. In attempting to eliminate the unacceptable loyalty premium (impacting on a minority of insurance customers), the regulator has unleashed price hikes across the entire market – increases that make the current rate of inflation (5.1 per cent) look like a financial walk in the park.
In late 2020, Fairer Finance commissioned some research into how consumers felt about the FCA’s intention to regulate away the loyalty premium. Although most confirmed their dislike of it, they also said they would not want to pay any more than five per cent extra in premiums in order to eliminate it.
Daley’s conclusion at the time? ‘The FCA rules are an overbearing way of supporting a small minority of insurance customers – and its intervention will have more serious unintended consequences.’
In other words, in (allegedly) saving one small group of insurance customers £4.2billion over the next ten years, the FCA has heaped massive extra costs on a far greater group. How large no one knows, but they will make £4.2billion look like a small number.
Good regulation? I will leave you to judge. But my gut feeling, like Daley’s, is a big fat NO.
Has your insurer increased your premiums at renewal? Email jeff. firstname.lastname@example.org