Aviva says that it plans to start offering loyal customers the same prices as new ones, breaking with one the most controversial practices in the insurance industry.
For years, insurers have offered new customers far better prices than people who have stayed loyal. According to Citizen’s Advice, 12.3m householders pay a “loyalty penalty” for their home insurance, for example, and it costs them over £708m per year.
But insurers are now under pressure to change their ways as regulators circle. The Competition & Markets Authority is investigating a so-called super-complaint from Citizen’s Advice about the cost of loyalty in a number of industries, while in October the Financial Conduct Authority launched its own probe into insurance pricing.
Aviva said that the price of its new product — AvivaPlus — would not be based in any way on the length of time the customer has been with the company. It will be available initially for car and home insurance but could eventually be rolled out to other types of insurance such as travel.
“This is pretty revolutionary in the market and we are keen to . . . evolve as we go,” said Andy Briggs, head of Aviva’s UK insurance business.
The prices Aviva charges for a particular policy could still change year on year depending on claims made and other factors such as the cost of replacing car parts or the cost of labour. The key difference with traditional policies is that loyalty is no longer a factor.
Mr Briggs, who is seen as one of the candidates to replace Mark Wilson as Aviva’s chief executive, said the product would be sold on a subscription basis. Customers will pay monthly and can cancel at any time. There will be no extra fees for paying monthly rather than annually — as there are with many insurers — nor will there be charges for changing or cancelling the policy.
Mr Briggs said it had taken over a year to develop the new product. “There was a lot of work to do to build up the processes and the systems. It needs to be robust.”
He admitted it would be difficult for customers to verify that prices for loyal customers were the same as they would be for new customers. And for the moment, AvivaPlus will only be available to people who buy directly from the company. It will not be sold on price comparison sites, although Aviva’s classic insurance policies — along with their classic charging models — will still be available.
“There will be some customers that say ‘I’m happy to shop around every year’ . . . there’ll be others that say ‘I’d rather have a better relationship with my insurance company and not have to shop around every year’.”
Nevertheless, he said that he hoped the product would eventually help to cut Aviva’s new business costs by persuading customers to stay loyal.
Some in the industry say that other insurers have tried similar pricing models with limited success. One of the problems they cite is that in a competitive market there will always be somebody willing to discount to win new business. Companies that want to encourage loyalty have to convince customers that it is worth paying more up front to keep the price down in future years.
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