Central Bank proposes to end the loyalty penalty for private car and home insurance customers

• Review finds that differential pricing practices can result in unfair outcomes for some consumers
• Proposal to ban the practice of ‘price walking’ to end the loyalty penalty for consumers who do not switch insurance provider regularly
• Proposals will ensure that new business discounts are still available to allow consumers to seek the best prices, while ensuring that those who remain with the same insurance provider are not penalized

The Central Bank is proposing to ban the practice of price walking following its Review of Differential Pricing in the Private Car and Home Insurance Markets.

The Review examined how differential pricing is used in the private car and home insurance sectors and established its impact on consumers.  Differential pricing is where customers with a similar risk and cost of service are charged different premiums for reasons other than risk or cost of service. While differential pricing can benefit consumers who are more likely to shop around for better prices, it can cause harm to consumers, particularly if it is used to increase prices by stealth, and can result in unfair outcomes for some consumers particularly those who are unable, or less likely, to switch providers.

The effect of banning price walking would remove the loyalty penalty imposed on customers who stay with the same insurance provider for a number of years. Banning the practice will mean that insurers could not charge customers who are on their second or subsequent renewal a premium higher than they would charge a year one renewal customer with similar risk and cost of service.

The Review was conducted through a multi-phase approach, which included a comprehensive market analysis and consumer research, based on the views of approximately 5,500 consumers.

The Review found that, as a result of price walking practices, the costs paid by some customers are higher than the expected cost of the policy to the insurance provider. The analysis shows that long-term customers, who stayed with their insurance provider for nine years or more, are paying, on average, 14% more for private car insurance and 32% more on home insurance than the equivalent customer renewing for the first time.

Based on the evidence from the Review we are proposing a series of measures to strengthen the consumer protection framework. These proposals are included for consultation in the final report. We are proposing to:

• Ban the practice of price walking in private car and home insurance.
• Require where new customers are offered a lower price to attract their business, it should be clearly disclosed to them that this includes a new business discount.
• Require private motor and home insurance providers to review their pricing policies every year to ensure they maintain focus on their pricing practices and the impact of such practices on their customers, while also ensuring adherence to new pricing provisions and the fair treatment of consumers.
• Introduce new requirements in relation to automatic renewals, which will include consumer consent for the automatic renewal of insurance contracts, to allow personal customers to make more informed decisions.

Director General, Financial Conduct, Derville Rowland, said: “A financial services system that sustainably serves the needs of the economy and consumers needs functioning and trustworthy insurance markets and insurance providers. Insurance providers are responsible for selling their customers products that meet their needs both now and into the future, and to do so fairly. While innovation in insurance provision offers the potential for improved products and services, it can also pose risks to consumers. Differential pricing is one such example, and in line with our mandate, the Central Bank will intervene to guard against firms using practices that are unfair to consumers.

“On foot of our comprehensive Review, we are proposing a number of policy measures to strengthen the consumer protection framework and protect consumers from the stealth practice of price walking, which we consider unfair. However, we are conscious of the benefits that pricing practices can also provide so our proposals are balanced to allow consumers retain the opportunity to avail of new business discounts to allow them to shop around for the best prices, while ensuring that those who remain with the same insurer are not unfairly hit by loyalty penalties.

“Our proposals will also set specific requirements on insurance providers to fully consider the impact of all decisions on their customers, putting their customers’ needs at the forefront of any policy decisions or changes to pricing practices.”

The series of policy proposals are set out in a public consultation, which will be open until 22 October 2021.  We welcome evidence based views in response to our consultation. Taking into account the views of stakeholders in response to this consultation, we intend to finalise these measures early next year and that they will apply to insurance providers from 1 July 2022.

Notes

The review was divided into three phases.  Phase one of the review involved an assessment of the market to establish how insurance providers are using differential pricing.

The Central Bank issued a Dear CEO letter to insurance providers in September 2020, highlighting our initial observations, outlining our next steps and setting out our expectations of firms.  An Interim Report was published in December 2020, providing a progress update on our work. It included initial observations arising from our market analysis (Phase 1) and from the commencement of our in-depth data analysis and consumer research (Phase 2).

The second phase of the review involved an analysis of almost 11 million individual policy records. As part of this phase, we concluded our consumer insights survey of 5,500 private car and home insurance consumers to further develop our understanding of how consumers engage with insurance providers.

The third phase has been informed by the findings in Phases 1 and 2 of the Review.

Examples of price walking in private car and home insurance

How the loyalty penalty works in private car insurance

• Customer 1 is renewing their policy for the first time
• Customer 2 is renewing the policy for the ninth time.
• They both have the same risk profile and expected cost of service.

The expected cost of providing both policies is €700. When the average loyalty penalty is added:

• The year one customer pays €763
• The year nine customer pays €875

The year 9 customer is paying €112 more than a first year renewal customer would have been charged.

Under our proposals, these customers should no longer experience a loyalty penalty.

How the loyalty penalty works in home insurance

• Customer 1 is renewing their policy for the first time
• Customer 2 is renewing the policy for the ninth time.
• They both have the same risk profile and expected cost of service.

The expected cost of providing both policies is €350. When the average loyalty penalty is added:

• The year one customer pays €357
• The year nine customer pays €473

The year 9 customer is paying €116 more than a first year renewal customer would have been charged.

Under our proposals, these customers should no longer experience a loyalty penalty.