As of January 2022, the Financial Conduct Authority implemented a change that meant insurers must always charge renewing customers the same or less than an ‘equivalent new business customer’. This month is the deadline for companies to attest that they have been complying with this. But what does this mean and why did they do it?
The ‘equivalent new business price’ (ENBP) is the price that a customer with identical circumstances would pay if they were to come to the company through the same channel as a new customer. In simple terms, it means that you’ll always get the same price at renewal or less than you would as a new customer. One important distinction though is ‘through the same channel’, which means the way that you became a customer. For example, going direct through the insurer’s website could be considered a different channel to going through a price comparison website. This new rule doesn’t mean that a customer will be given the same price in both these places, but if they were a renewing customer who originally bought direct, they must be quoted the same price as a new customer coming direct through the website.
You have likely experienced the reason for this yourself and it’s called price walking or dual pricing. The idea was that insurers would offer very low introductory offers to new customers, but when they came to renew they would hike the price up for seemingly no reason. A proportion of customers would of course notice this, and either go elsewhere for a new cheap deal or haggle them down to a more reasonable rate. However, some would accept the rise in price, and over time these customers fund the insurer to be able to offer the cheap deals in the first year which would otherwise lose them money. It is essentially the loyal customers who pay for new customers to get cheap deals, which is why it is also known as a ‘loyalty penalty’.
This was particularly prevalent with older customers who were less comfortable shopping around at renewal. It is common for customers who took out a policy with their bank alongside their mortgage 20 years ago to still be on the same home insurance policy, but now be paying two or three times too much for it than a new customer would.
At this point it’s worth noting that we have never price walked customers at coverbaloo, as it has always been clear to us that this is not fair to customers and not how we conduct business.
This becomes more problematic for big or old insurers, who still have policies that they may no longer sell to new customers. In these cases, the regulator has said they must still price renewals against the ENBP of an equivalent product or channel if the original one is no longer available.
For almost everyone it will mean a change in the price of your insurance, but the direction that this goes will depend on your provider or circumstances.
Customers who have been dramatically overpaying due to the loyalty penalty are likely to see a large drop in their premiums, which is very good news for these customers and the industry in general as it puts a stop to this unfair practice.
However, for many people who shop every year using the price comparison websites, they are likely in for an unpleasant shock. Despite the regulator’s intention that this would result in everyone paying the same as the new customer introductory offers, it is most likely that prices will meet in the middle between this and the sky-high old renewal prices.
It still remains to be seen how the market will react to this over time as things calm down, but initially it is expected that many providers will be raising their prices, many by as much as 30%. As mentioned above, this is partly because they won’t be able to sell at a loss in a customer’s first year anymore, but also to rebalance the money that most big insurer’s will be losing on their very profitable renewing customers.
At coverbaloo, our underwriter for Home Insurance is RSA, one of the UK’s biggest and most reputable underwriters. However, despite the fact that coverbaloo has never price walked customers, and so should not really be affected by this regulatory change, we may still see some increases as insurers raise prices generally and due to inflation in the cost of claims. The impact for our customers is that prices are likely to go up a bit at the next renewal. If this does happen for you, we promise that it is not something that we want to do and our hope is that ours will not go up as much as the rest of the market so we still remain competitive.
The change became mandatory for insurers for renewals invited from 1st January 2022, which in practice means policies renewing from end of January onwards as you typically get a message about your renewal premium two or three weeks before it actually renews.
That means that if you were to go and shop around now, you’ll already notice that prices in the market have changed. If you don’t shop around, you should expect to see a big shift in your price at renewal. If you’re used to shopping around at renewal then still do this, but you may not find the same range of offers or low prices that you’ve been used to in the past.
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