The FCA is implementing a package of remedies to improve competition and protect home and motor insurance customers from loyalty penalties.
This includes new rules so that renewal quotes for home and motor insurance consumers are not more expensive than they would be for new customers.
In a statement, the FCA said: "These measures address the issues identified in the FCA's September 2020 market study, which found that millions of home and motor insurance customers lose out if they renew repeatedly with their current providers. In 2018, six million loyal policy holders would have saved £1.2 billion had they paid the average price for their actual risk.
"Many firms increase prices for existing customers each year at renewal - this is known as price walking. This means that consumers have to shop around and switch every year to avoid paying higher prices for being loyal. It also distorts the way the market works for everyone. Many firms offer below-cost prices to attract new customers. They also use sophisticated processes to target the best deals at customers who they think will not switch in the future and will therefore pay more."
The FCA said its new rules will stop firms price walking.
Insurers will be required to offer renewing customers a price that is no higher than they would pay as a new customer. It is likely that firms will no longer offer unsustainably low-priced deals to some customers, the FCA said. However, the FCA estimates that these measures will save consumers £4.2 billion over 10 years, by removing the loyalty penalty and making the market work better.
In addition to the new rules on pricing for home and motor insurance, the FCA is also bringing in new rules to:
· give most consumers easier methods of cancelling the automatic renewal of their policy,
· require insurance firms to do more to consider how they offer fair value to their customers, and
· require home and motor insurance firms to report data to the FCA so that it can supervise the market more effectively
Sheldon Mills, Executive Director, Consumers and Competition at the FCA, said: "These measures will put an end to the very high prices paid by many loyal customers. Consumers can still benefit from shopping around or negotiating with their current provider - but won't be charged more at renewal just for being an existing customer.
"We are making the insurance market work better for millions of people. We will be watching closely to see how the market develops in the future and to ensure firms continue to deliver fairer value to consumers."
The pricing, auto-renewal and data reporting remedies will come into effect on 1 January 2022.
The rules on systems and controls, product governance and premium finance take effect from the end of September 2021.
Alongside today's Policy Statement, the FCA has also published research on how incentives affect consumers' choices, focusing on purchases of motor and home insurance made through price comparison websites. The research was undertaken to inform our approach to the new pricing rules.
In a statement, the FCA said: "The FCA will continue to monitor the market closely to ensure firms are ready to implement the pricing changes on time. The FCA will also review the effects of the remedies over the course of 2022, ahead of a full evaluation in early 2024."
Charlotte Clark, Director of Regulation at the Association of British Insurers, said:"Insurers support these reforms and will continue working closely with the FCA to ensure they are delivered effectively. While the FCA recognises their interventions could lead to price increases for consumers who regularly shop around, these remedies should ensure that all customers get fair outcomes from competitive insurance markets.
"It is vital that the new rules are applied across the whole insurance market, including price comparison websites and insurance brokers, with a uniform level of supervision and monitoring by the FCA, to ensure good customer outcomes. As the FCA has said previously, insurers do not make excessive profits and, as they now point out, it is likely that firms will no longer be able to offer unsustainably low-priced deals to some customers.
"It will remain important to maintain incentives for customers to shop around, while ensuring competitive deals for those who stay with their insurer. When shopping around people should ensure that they choose the right product for their needs, looking at the overall value of the product, and not just buying price."