The following is an opinion piece from Steven O’Callaghan, insurance product manager, Bought By Many. The views expressed are not necessarily those of Insurance Business.
How do insurers build loyalty when consumers are told that sticking with the same insurance company or phone contract year after year costs them more money?
The dual pricing model used by many insurers exploits customer loyalty rather than rewards it. Enticing new customers with cheap introductory offers while existing customers see their premiums increase each year has become accepted practice but it’s one that is unfair and provides a poor customer experience.
Citizens Advice’s super-complaint about the loyalty penalty to the Competition and Markets Authority (CMA) should be a wake-up call for the insurance industry. The CMA estimates that across the five insurance markets of home insurance, mobile, broadband, mortgages and savings, the total penalty for loyalty could be £4 billion.
Citizens Advice found 8 in 10 people are paying a significantly higher price in at least one of these markets for remaining loyal with their existing supplier.
The government, the Financial Conduct Authority, and the Association of British Insurers have all spoken out against dual pricing. So far there has been little change but insurers need to take action before consumer trust in the industry is eroded further.
Commercial success at the expense of loyalty
The strategy of ramping up prices for loyal customers to fund discounts to win new customers is a dangerous game, especially with the super-complaint in the public domain.
Now that millions more are aware they’re being ripped off for being loyal, who knows how many customers will switch providers or even decide not to get cover the next time they move home or book a holiday?
When prices get too high many people will move to another company, but we’ve seen how dual pricing in pet insurance creates a cruel trap.
With home and car insurance, consumers can easily switch if they spot a better price, but pet owners can’t always do this. If a condition started while a pet was covered by a previous policy, a new provider will refuse to cover it, whether it was claimed for or not. This leaves pet owners stuck on a policy and makes them easy targets for annual price increases. And if they do switch when their premium gets too expensive, they often have to pay for treatment for the pre-existing condition themselves. At worst they may be faced with a decision not to treat their pet because they cannot afford it.
We’ve heard plenty of cases of owners cancelling their cover altogether when premiums hit a certain level. But we doubt anyone is measuring the negative impact of these consumers’ word of mouth horror stories on other pet insurers or the industry as a whole.
Taking the lead
A perceived lack of financial incentive and the conservative nature of insurance means few companies have chosen to take a lead but at Bought By Many we created our cover to build genuine long-term loyalty. We want customers to stick with us and pay fair premiums for the life of their pet rather than switch or cancel early.
Our existing customers will never pay more for our pet insurance policies than new ones, and in some cases they will pay less. There are no introductory discounts and we don’t penalise pet owners who make a claim. We’ve even launched the first policy that covers pre-existing conditions so people can switch to us instead of feeling trapped with their current insurer.
We’re delighted to see some other businesses follow suit. Aviva recently unveiled revamped car and home products that guarantee existing customers will pay the same price as new policyholders.
The government’s proposed ban on dual pricing can’t come soon enough for consumers. But with no dates for legislation, change needs to come from within the industry now. Incumbent insurers have long lead times to change direction and although some businesses may feel they can absorb a fine here and there, being left on the wrong side of a ban risks reputational damage.
Our model shows insurers can develop pricing that establishes long-term loyalty and sustained revenue by building trust and treating customers fairly.