Everything you need to know about the new era of insurance pricing - and how to get the best deal

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Everything you need to know about the new era of insurance pricing - and how to get the best deal
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The new year marks the start of the biggest insurance shake-up for decades. Under strict rules set by the City watchdog, from January 1 insurers will no longer be allowed to overcharge loyal customers. 

It is a victory for Money Mail, which has long campaigned to end the £1billion-a-year loyalty penalty. But as our investigation today reveals, customers will have to keep their wits about them to avoid paying more than they have to. 

And as the deadline draws closer, experts have accused firms of employing sneaky pricing tactics to cash in while they can. Some policyholders say insurers are continuing to hike premiums at renewal, despite offering new customers a much cheaper deal. 

Everything you need to know about the new era of insurance pricing - and how to get the best deal
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Others are offering tiny price cuts of a few pence in a bid to cling on to their business. Yet a sharp drop in the cost of cover since the pandemic means failing to challenge your renewal quote could mean you miss out on significant savings. It is estimated that car insurers have already pocketed £3.3billion during the Covid crisis by failing to pass on savings to customers, according to the Association of Consumer Support Organisations. 

Firms made an extra £118 per customer but gave discounts worth just £25 to policyholders, on average, the research showed. Experts are warning new customers to prepare for price hikes of up to 30pc next year as insurers seek to minimise the impact of the new rules on their profits. 

They also claim that insurers will be hungry for data, which could mean households and drivers are forced to answer long questionnaires when applying for cover. Here, Money Mail explains everything you need to know about the new era of insurance pricing — and how to get the best deal. 

WHAT WILL BE CHANGING? 

For years, insurers have hiked prices for loyal and often elderly customers while tempting new customers with discounted deals that can be hundreds of pounds cheaper. But, from January 1, firms will have to offer new and existing customers the same price. This applies to vouchers and cashback, too. So if a firm offers new customers a £20 gift card, those renewing their policy should get a discount of the same value. 

However, prices can be ‘channel specific’, which means they could differ depending on how you buy your policy. For example, if you took out a policy through a price comparison site, you may not be quoted the same premium if you went direct to the insurer. Your individual circumstances and any claims you have made will also impact your premium as usual. The new rules only apply to car and home insurance — but not other types of policies such as boiler breakdown, pet and life cover. 

WILL PREMIUMS SHOOT UP? 

Everything you need to know about the new era of insurance pricing - and how to get the best deal
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Car and home insurance costs have plummeted since the pandemic after a fall in claims because policyholders were at home. The average motor insurance premium dropped by 11pc to £619 in the 12 months to August, according to data from Comparethemarket. Meanwhile, the cost of a typical building and home contents policy fell by 7pc to £191.38. 

But experts warn that prices could shoot up again for new customers when insurers cannot charge loyal policyholders higher premiums. If firms are no longer willing to offer cheap deals because they cannot recoup losses from existing customers, savvy switchers could lose out as a result. Industry sources have told Money Mail that new home insurance customers could end up paying around 30pc more next year, while car cover costs could rise by 15pc. 

However, if you have been with the same insurer for years you could be in line for a significant price cut. Experts suggest this could be as much as a 40 pc reduction for home insurance customers and 10pc for motorists, according to analysis of data from City watchdog the Financial Conduct Authority (FCA). The savings differ because motorists are more likely to shop around for cover than home insurance customers so the price gap is not so wide. 

I TURNED 3p SAVING INTO £50

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When Maddy Watkins received her car insurance renewal quote in June, it was just 3p lower than the previous year. But after searching online, she discovered that her insurer Hastings was offering new customers the same deal for £50 less than the £487.27 price she had been offered. 

Maddy, 23, a nurse, first passed her test in 2016 and had expected her premium to continue coming down as it had in previous years. As she has never made a claim, she called Hastings and an agent agreed to renew her policy at the cheaper price. 

Maddy, who lives in Leicester, says: ‘It was cheeky to offer me such a small discount. ‘It is like they thought I would just accept it and not shop around.’ 

A Hastings spokesman says the firm had not ‘completed the necessary system changes’ when Maddy renewed her policy. He adds: ‘We continue to proactively support and work towards the regulatory changes from the FCA in the coming months.’ 

SHOULD I STILL SHOP AROUND? 

Barely more than a third of home insurance customers said they would make a concerted effort to shop around after the new rules come into force in January, according to a survey by Comparethemarket. But households are being urged not just to accept their renewal offer after January. This price will be the cheapest deal available from that firm for a particular level of cover. 

But comparison sites could still help you find a cheaper policy with another insurer. Drivers can currently save around £267 by shopping around for a better car insurance deal and £110 for home cover, according to research by Comparethemarket. And while these savings are set to shrink next year, it is expected that comparison websites will be looking to win new customers with added incentives. 

GoCompare, for example, is offering drivers who use its website £250 towards any excess they may have to pay when claiming on their car insurance. These incentives for new customers are allowed under the new rules, as long as the insurer is not directly funding them. Insurers will also be able to offer exclusive deals through the sites. But these should be matched for existing customers. Customers who take out policies through cashback websites such as Quidco or TopCashback could also make additional savings. 

IS IT BEST TO SWITCH NOW? 

If your policy is due to expire before the end of the year, be sure to take advantage of cheap deals elsewhere before they disappear. Many customers have reported sticking with their existing insurer after receiving a slightly reduced quote at renewal. More than a quarter of home and car cover customers have seen their premiums cut over the past 12 months, according to research by Comparethemarket. 

But around a fifth of these policyholders said they had been offered discounts of £9 or less. And falling premiums mean you could save hundreds of pounds more by shopping around. Ursula Gibbs, a director for the site, says: ‘In lowering prices now, insurers are trying to lock in as many customers as possible and drive down switching.’ 

Louise O’Shea, chief executive of Confused.com, adds: ‘If your renewal price has decreased to less than last year, it’s likely that other insurers have reduced their rates as well. So, it’s worth shopping around before accepting tiny discounts.’ The best time to shop around for a new car insurance deal is 23 days before your renewal quote, according to analysis of millions of quotes by MoneySavingExpert. For home insurance, it is 21 days before your policy expires. 

This is because insurers tend to view those who wait until the last minute as higher risk. If your policy does not expire until after the new rules come in, you could consider renewing early. Your insurer should refund you for the months not used if you paid for your cover upfront in full. But there may be an exit fee of around £50, so you must to be able to save more than this for it to be worthwhile. And check you will not lose any perks by switching early, such as a year of no claims, which can earn you future discounts. 

HOW COULD INSURERS REACT TO THE MOVE? 

Everything you need to know about the new era of insurance pricing - and how to get the best deal
© Provided by This Is Money Insurers may begin asking new customers more questions to ensure they are not losing out by offering cheap prices to higher risk customers

Insurers have previously lured in new customers by offering cheap policies that top the best-buy tables on comparison sites. But from January experts expect firms to compete by offering different levels of cover. Ryan Fulthorpe, of comparison site Go­Compare, says: ‘We could start seeing more bronze, silver and gold policies — with gold plans offering the most extensive cover at the highest prices.’ 

By doing this, insurers could justify a price increase at renewal if the customer has a higher level of cover than its cheapest deal on offer. It is also widely believed that insurers will start using even more detailed data to price premiums. James Daley, of consumer group Fairer Finance, says: ‘Age could be used to justify a price hike at renewal. For example, a 44-yearold man could be told that the firm prices 43-year-old men differently. But if an insurer chooses to go down this route they will have to charge all new 44-year-old policyholders the same price and that could mean they miss out on business.’ 

THE RENEWAL TRAP COST ME DEARLY 

Everything you need to know about the new era of insurance pricing - and how to get the best deal
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Gordon, 98, took out home insurance with Age Co 11 years ago. He believed the policy, offered by charity Age UK, would offer a fair deal. But his niece Janet Wilson, 65, discovered he has been overpaying by hundreds of pounds. Gordon, who did not want to give his surname, had allowed his policy to auto-renew each year. 

But the policy price increased again last month, by £43.74 to £568.47. He was paying an extra £50.88 a year because he does monthly instalments. Janet has found him another deal for less than a sixth of the price, at £86.80. 

Gordon, a widower from Barnsley, says: ‘I was probably careless. I just let the policy roll over. But the company was linked to Age UK so I didn’t expect it to rip me off.’ An Age Co spokesman says it takes its responsibilities seriously, adding: ‘Every year, at renewal, we ask customers to check their policy and cover to ensure all the information is correct and the policy continues to meet their needs.’ 

Gordon has been offered a £1,123 goodwill gesture but has refused it. 

Insurers may also begin asking new customers more questions to ensure they are not losing out by offering cheap prices to higher risk customers. Darren Black, head of insurance at Nationwide, says: ‘Some home insurers will ask a customer if they have a cat or a dog, because dogs are more likely to knock something over. We could see more of those kind of questions and longer application forms as firms will be hungry for as much data as possible.’ 

Another concern is that insurers could attempt to manipulate the system by hiking premiums for new customers when they are due to send out a large amount of renewal letters. This means they would not have to offer existing customers such cheap deals. On a positive note, insurers could strive to improve customer service to stand out from the crowd. A survey by analysts Mintel revealed that 32pc of home cover customers would switch provider if they thought another firm had a better service record. 

WHAT ABOUT EXTRA FEES? 

Customers who spread the cost of their annual policy over 12 monthly instalments are often charged high rates of interest, which can add more than £100. Insurers also typically charge additional fees for any changes made mid-policy, such as amending your job title. Under the FCA’s new rules, firms will be required to do more to consider how they offer ‘fair value’. 

Experts say this could mean punitive charges are scrapped or reduced. Brian Brown, of data analysts Defaqto, says: ‘These fees might not disappear overnight but firms may decide to reduce them if they are going to have trouble justifying them as fair.’ Insurers will also have to make sure it is easy for customers to opt out of policies that renew automatically after a year. This might include reducing call waiting times. However, drivers should bear in mind that car insurance is a legal requirement and the option of allowing a policy to roll over ensures you are never without cover. 

WHICH FIRMS WILL BE WORST HIT? 

Larger firms, such as Admiral, Axa, Direct Line and Aviva, are likely to have the biggest databases of existing customers. This means they may have to reduce premiums for more policyholders than their rivals — which could in turn force them to increase prices across the board. But industry sources say these types of firms are more likely to have the capital set aside to weather the change. 

Smaller firms may struggle to attract new customers if households become less likely to shop around. Darren Black says: ‘You could see quite a few of smaller firms exit the market entirely.’ But James Daley adds: ‘The advantage some of the smaller firms have is that they will have very few existing customers they may need to offer reduced renewal quotes for.’ 

HOW TO MAKE A COMPLAINT 

The FCA will be keeping a close eye on how insurers respond to the new rules. Firms will also be required to hand over more data around policies and pricing. But you can complain yourself if you discover you have been overcharged over the years and could have got a much cheaper price as a new customer. If the firm ignores your complaint, go to the Financial Ombudsman. 

More than a fifth of complaints about premium prices were upheld in favour of customers last year. A spokesman for the Association of British Insurers says it fully supports the reforms and will be working closely with the FCA to ensure they are delivered effectively. 

He adds: ‘As the FCA has said previously, in a highly competitive market where insurers do not make excessive profits, any revision is likely to lead to a re-balancing between new and renewing customers. ‘Motor insurers supported customers throughout the pandemic including providing cover for key workers to drive to work free of charge.’ 

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