Customers who renew their home or car insurance will no longer be charged as new policyholders after the finance watchman puts an end to companies that are imposing a loyalty penalty.
People who automatically renew their policy with their insurer are often charged higher premiums than new customers, who are usually offered the best deals.
The Financial Conduct Authority (FCA) found that new customers paid an average of £ 285 per year for car insurance, while customers who were with their provider for more than five years were charged £ 370.
In the home insurance market, new customers were paying £ 165 a year for building and content coverage, while premiums had risen to £ 287 after five years.
The prohibition of the price hike, where insurance premiums increase year on year rather than because of the higher risk, would save consumers £ 4.2 billion over 10 years.
Around 10 million policies in the home and auto insurance market are held by people who have been with the same provider for five years or more, and many could see their premiums cut due to the ban coming into effect in January.
For customers who shop every year, it could mean the end of the cheapest deals available.
The FCA said many insurers were offering below-cost deals to attract customers and using sophisticated procedures to get the best deals for customers they believed would not switch in the future and would end up paying more .
Sheldon Mills, FCA General Manager, Consumer and Competition, said, “These measures will put an end to the very high prices paid by many loyal customers.
“Consumers can continue to benefit from shopping or negotiating with their current provider – but there is no higher cost to renew just because they are already a customer.”
The ban follows a super-complaint from consumer groups about fidelity penalties paid by customers in the mortgage, savings, cellular, insurance and broadband markets.
Matthew Upton, a political director for one of the groups, Citizens Advice, said: “We are delighted that the FCA has set the bar so high in combating this systematic fraud, and we must now see similar action in the other markets.
“Loyal insurance customers will no longer face price increases – incremental year-on-year increases – that can result in them paying well beyond their odds. Instead, companies need to do the right thing and offer them the same offering as a new customer.
“For us and these loyal customers, this solution cannot come soon enough.”
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Gareth Shaw, Head of Money at Which? Said, “Insurance companies have used harsh pricing tactics for far too long to lure customers in before hitting them with staggering price hikes and exorbitant premiums to put an end to these unfair practices.”
Shaw called on the FCA to do further work to determine if there are other practices in the insurance market that should be banned.
Mills said the FCA had “made the insurance market work better for millions of people” and would “monitor closely how the market performs in the future and to ensure that companies continue to provide fairer value to consumers”.
