After a year-long lead-in period, a ban on the controversial practice of price walking in the car and home insurance sector has come into effect. But what does it mean for consumers?
A ban on the controversial practice of price walking in the insurance sector has come into effect today.
The ban should hopefully see car and home insurance customers avail of lower premiums.
The Central Bank has been looking into the thorny issue of pricing in the insurance sector for several years now following pressure from the Government and Sinn Fein’s finance spokesperson Pearse Doherty.
Last July the Central Bank released its third and final report into insurance pricing and announced its intention to ban price walking (but not dual pricing). And after a year-long lead-in period this change has now come into effect.
So what exactly does this all mean for car and home insurance customers?
First, here’s a reminder on what price walking is…
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'.
Insurance companies are able to use detailed analytics and algorithms to target those customers it knows are more likely to pay the higher prices.
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.
Insurers denied they were engaged in the practice but reviews by the Central Bank showed it was common.
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 their car insurance and 32% more for their 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?
From today, price walking in the car and home insurance sectors has been banned.
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 driving a 1.1 litre Ford Ka with five years’ no-claims bonus will obviously always be charged less than a 20-year-old driving a 2-litre Audi 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 hasn’t been banned is 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. Which you can avail of right here on bonkers.ie of course!
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.
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.
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What do you think?
What do you make of the ban on price walking? Does it go far enough or do you think dual pricing should have been banned too?
We’d love to hear your thoughts in the comments section below!