Loyal customers pay considerably more for insurance than switchers

Loyalty could be costing the typical home insurance customer €161 a year, with the widespread use of dual pricing in the Irish market meaning that insurance companies are incentivising new customers rather than rewarding existing ones.

This is one of the findings in a new review from the Central Bank into pricing in the car and home insurance markets, which also found that older people, by virtue of staying with their insurance provider for longer, were paying more for their car and home insurance due to the so-called "loyalty premium".

The review, published on Monday, is the latest stage in a Government-backed process aimed at ensuring better outcomes for buyers of insurance by understanding how insurers price policies. It examined more than 11 million policies from the period 2017-2019, and found evidence of dual pricing across the private car and home insurance markets.

The review was first signalled last year, when Derville Rowland, director general financial conduct at the Central Bank,suggested the regulator could consider an outright ban, but that it would be dependent on the outcome of this report.

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Dual pricing, or differential pricing, is when some consumers are charged higher prices than others. It is widespread not just in insurance but also across the travel and telecoms sectors, and typically happens when insurers charge new customers lower premiums than those who are renewing.

Price sensitive

The report found that customers who automatically renewed with their insurer were subsidising those who were more price sensitive and who shopped around to get lower new business rates.

It also found evidence of “price walking”, whereby insurers increase premiums incrementally each year for existing customers come renewal time.

“The longer a customer remains with an insurer the higher cost they are paying,” Ms Rowland said.

The report gives the example of a customer being charged €312 for a home insurance policy, while a similar risked customer, who had been with the insurer for nine years, was charged €473.

Where consumers do shop around, the report found that it was typically to try and negotiate a better price with their current provider, rather than switching. A much higher level of inertia was found in the home insurance market compared with private car insurance.

Taking action

The publication of the report comes after Sinn Féin announced it would publish a Bill this week to ban the practice in the Irish market, on the grounds that it was leading to consumers being charged artificially high premiums. In the UK the Financial Conduct Authority (FCA) has moved recently to ban the practice outright, while in the US, it is banned in some 20 states, including New York and Florida.

Responding to the Sinn Féin move, Ms Rowland said that any action needed to be “finely calibrated” to ensure that consumers would not lose out, and that the best way to achieve this was to let this “detailed piece of work to proceed”.

While the evidence found in the report suggested that immediate action could be warranted, Ms Rowland said that doing so would be “previous”, and that it was important that a detailed understanding of the market be achieved.

Ms Rowland noted that dual pricing had some benefits for consumers, because some will “get a better price than they would normally expect to get” and thus further analysis was needed to decide on the “most effective measures to protect consumers”.

According to its plan for the insurance sector, published last week, the regulator is expected to publish its final report in September 2021, with the Government taking appropriate action by the end of the following year.