Central Bank to ban ‘loyalty penalties’ for car and home insurance customers

In a much anticipated report the Central Bank has announced today that it plans to ban ‘price walking’ in the car and home insurance sectors. 

The Central Bank has been looking into the thorny issue of pricing in the insurance sector since last summer following pressure from the Government and has already released two interim reports on the matter (you can take a look here at our review of the second report, which was released in December of last year).

Today’s third and final report seeks to ban the practice of price walking but it has stopped short of banning dual pricing. 

So what exactly does this all this mean for car and home insurance customers?

What is price walking?

Price walking is a pricing strategy whereby loyal customers who stay with the same insurer for many years gradually end up getting charged higher and higher prices at each renewal. In other words their loyalty is penalised and they end up paying a so-called 'loyalty premium'.

As the increase in price each year might only be slight, the consumer may not notice much of a difference. However, after seven or eight years, for example, the price differential between a loyal customer and someone who has regularly shopped around can add up to hundreds of euro. 

In fact a review of the practice by the Central Bank found customers who stayed with their insurance provider for nine years or more, are paying, on average, 14% more for car insurance and 32% more for home insurance than the equivalent customer who is renewing for the first time.

Older, more vulnerable consumers who may not be adept at shopping around or doing research online are usually most impacted by price walking - however everyone is at risk.

Price walking is a form of dual pricing...

What is dual pricing? 

Dual pricing is also sometimes referred to as differential pricing. It can be used to describe any situation in which customers of the same company are charged different prices for the same product or service. However it is usually used to describe a pricing strategy whereby new customers are charged a lower price compared to existing customers, usually through an introductory discount or special offer.

New customers being charged cheaper prices than existing customers (usually for a year or so) is extremely common in almost every industry and not just the insurance sector. 

So what’s changing?

On foot of today's report, the Central Bank is seeking to ban price walking in the car and home insurance sectors.

So basically, insurers will no longer be able to charge an existing customer who’s renewing their policy for a second, third or subsequent time any more than an existing customer who’s renewing for the first time. This is provided both consumers have the same risk profile of course. A 40-year-old woman driving a 1.1 litre Ford Ka with 5 years’ no claims bonus will obviously always be charged less than a 20-year-old male driving a 1.5 litre car with no previous driving experience for example! 

However, all other things being equal, you can’t be penalised for being loyal to your insurer anymore.

However, what today's news doesn’t do is ban dual pricing, so car and home insurers are still free to offer introductory discounts to brand new customers who sign up for the very first time.

In other words, if you’ve been with an insurer for many years, you can’t be charged any more than someone with a similar risk profile who is renewing for the first time or who has only been with the insurer a few years. However you may still be charged more than a brand new customer who has switched insurer and is signing up for the very first time.

This means consumers are still free (and encouraged!) to shop around each year for the very best value. 

Automatic renewals 

As well as the above, the Central Bank will introduce new requirements in relation to automatic renewals. 

The main change is that consumers will need to give explicit consent for the automatic renewal of their insurance policy, to allow them to make a more informed decision.

A good compromise?

Some politicians, and Sinn Féin in particular, had campaigned hard to ban dual pricing entirely.

This would have meant everyone had to be charged the same price - so no introductory discounts or special offers. 

The assumption was that the low prices offered to attract new customers would have to be offered to everyone else. A great win for consumers, surely?

However this was perhaps a bit naive...

The deep discounts that companies offer to lure in new customers for an initial year or so may not always be sustainable in the long run or profitable enough for a company to offer everyone. 

So by banning dual pricing entirely, an unintended consequence could simply have been no introductory discounts and higher prices all round.

At the moment, consumers who are prepared to take the time to compare the market and switch regularly can avail of big savings and discounts, which is something the Central Bank has acknowledged as a benefit of dual pricing.  

Also, if the Central Bank were to start overly micromanaging or dictating what prices insurers are allowed to charge, it could result in some companies exiting the market, thereby reducing competition and choice for consumers and putting upward pressure on premiums.

So by banning price walking, but not dual pricing, a good compromise appears to have been reached. Car and home insurance customers will no longer pay ‘loyalty penalties’ or a ‘loyalty premium’ for staying with the same insurer. However insurers are still able to compete aggressively for new customers through lower prices for the first year.  

As Derville Rowland, Director General, Financial Conduct, of the Central Bank, said:

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.

That being said, the Financial Conduct Authority (FCA), the regulator in Britain, has moved to ban the practice of dual pricing outright following a full review it concluded earlier this year so it will be interesting to see the impact this has on the market over there and whether the Central Bank eventually follows its lead.

When will the new measures come into force?

The Central Bank says it will consult with various stakeholders in the industry until October 2021. After taking into account their views, if relevant, it hopes to bring the new rules into force from July 2022.

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The Central Bank’s decision to ban price walking will impact car and home insurance policies. If you’re looking for more information on either of these, check out our guides below:

• Here are 12 things to consider when taking out car insurance to make sure that you’re getting the right cover for your needs.
• You may also want to take a look at these 10 mistakes to avoid when taking out car insurance to ensure you’re fully informed when making a decision.
• It’s actually surprisingly easy to reduce your home insurance premium. Here are 10 ways to reduce your home insurance costs that won’t affect your level of cover.

What do you think?

What do you make of today’s much anticipated news from the Central Bank? Does it go far enough? Would you like to have seen dual pricing banned too? We’d love to hear your thoughts in the comments section below!

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