Home insurance customers ‘paying hundreds of pounds more with loyalty penalty’

Loyal home insurance customers who stick with the same provider for six years or more are driving the profits of firms in this sector, analysis from Citizens Advice suggests.

The charity said loyal customers are paying an average annual premium of £325 for their sixth year of insurance – nearly double that of new customers (£172).

The Citizens Advice research suggests that home insurance providers tend to make their profits from those customers who remain loyal for six years or more.

But the Association of British Insurers (ABI) said that whether or not a firm makes a profit depends on “many factors” and companies have committed to review premiums charged to customers who have been with them for more than five years.

Those sticking with their providers year in, year out could find themselves paying hundreds of pounds more for their policies than those who switch every year, Citizens Advice found.

Citizens Advice said that after six years, a loyal customer could typically expect to have paid a total of £1,596 – more than £500 more than someone who spends every year as a new customer with their insurer, paying £1,032 on average.

Citizens Advice looked at the typical costs of home insurance, contents insurance, and combined home and contents policies to make the findings.

It said it had taken figures from Financial Conduct Authority (FCA) and ABI research to make its calculations.

The charity said that in 2016 there were 9.3 million policies across the UK where customers had been loyal to their provider for six years or more and 6.9 million policies where customers switched after a year.

Citizens Advice said it is particularly concerned that vulnerable people, including those in poor health, may be particularly likely to end up paying the loyalty penalty.

It estimates that 3.75 million policies have been held for 11 years or more and over seven in 10 (71%) of these customers are potentially vulnerable.

Citizens Advice said that in one case it had seen a 76-year-old pensioner who suffers from severe arthritis who had been with the same provider for over 10 years received a renewal letter wanting to increase her premium from £1,500 to £3,500 a year.

She said: “I was shocked, really confused and also sad that they expected me to pay so much.

“I had no choice but to find a cheaper provider. As I don’t have access to the internet I went through the Yellow Pages and called quite a few insurance providers and found a far cheaper deal of £958 per year.”

Citizens Advice submitted a “super-complaint” on the loyalty penalty, in the mobile, broadband, home insurance, mortgages and savings markets, to the Competition and Markets Authority (CMA), which made recommendations after finding that “damaging practices” by firms including stealth price rises for unsuspecting customers.

Gillian Guy, chief executive of Citizens Advice, said: “What makes this worse is that vulnerable people are likely to be the most loyal to their provider.

“Since we submitted our super-complaint about the loyalty penalty, some companies have rightly promised to treat their customers better, yet many more are still choosing to make their profits off their most loyal and vulnerable consumers.”

Hugh Savill, director of regulation at the ABI, said: “Whether a firm makes a profit or not depends on many factors which these figures overlook.

“However, the insurance industry has already acknowledged that fierce competition between insurers for new business can result in long-standing customers losing out.

“Last year, insurance became the first and only sector to take voluntary, industry-wide action to tackle this issue, with firms committing to review premiums charged to customers who have been with them for more than five years.

“We always encourage people to shop around at renewal because, as Citizens Advice confirms, you can often get exceptional value this way.”