Six million home and motor insurance holders are overpaying by a total of £1.2bn per year because firms are not giving loyal customers fair premiums, a watchdog has warned.
The Financial Conduct Authority (FCA) found evidence of insurers overcharging long-standing customers through tactics such as selling policies to new consumers at a discount, then increasing premiums when they renew.
What’s more, firms specially target increases at those less likely to switch. People who pay high premiums are less likely to understand insurance or the impact that renewing has on their premium.
The FCA has estimated that around six million consumers pay around £200 too much on their premiums.
Most firms, when setting a price, include their expectations of whether a customer will switch or pay an increased price. This is not made clear to the customer, the FCA said.
Long-standing customers pay more on average, but even some people who switch pay higher prices.
It also found several firms “engage in a range of practices to raise barriers to switching”, which includes how they operate auto-renewal policies.
This affects all types of customers, including one in three people who are potentially vulnerable, the FCA said.
The FCA’s found a third of customers who paid high premiums showed at least one characteristic of vulnerability, such as having lower financial capability.
Of those who buy combined contents and building insurance, lower income customers – who earn below £30,000 – pay higher margins than those with higher incomes.
Christopher Woolard at the FCA said: “This market is not working well for all consumers. While a large number of people shop around, many loyal customers are not getting a good deal. We believe this affects around six million consumers.
“We have set out a package of potential remedies to ensure these markets are truly competitive and address the problems we have uncovered. We expect the industry to work with us as we do so.”
The report outlines steps the FCA is taking to address the problems it has identified. These include potentially banning or restricting firms from raising prices for consumers who renew year on year, or requiring them to automatically move consumers to cheaper equivalent deals.
Improving the way firms communicate with customers, and restricting the use of automatic renewal to discourage switching, are also priorities.