From July 1, insurers of home and contents, motor, personal and small business in NSW will be required to include last year’s premiums in any renewal notices.
In fact, I have been advised that the same change will be made without legal compulsion by insurers everywhere in Australia.
Until now, insurance notices normally have not stated what the previous year’s premium was. Accordingly, consumers and small-business owners don’t know how much the price has gone up.
As a result most are victims of a loyalty tax – that is, they pay far more in years two, three, four, five and so on than in year one and most people don’t know it.
Our research shows that in year two, loyal consumers of home and contents insurance pay twenty-seven percent more than new policy holders. This translates to hundreds of dollars to the average home and contents policy.
Say the policy in year one costs a $1000, in years two and later years, it would typically be $1250 to $1300 dollars or for an initial premium of $2000 it could be $2500 or more.
This loyalty tax occurs when discounts are offered to attract new customers, but premiums are increased at the first and subsequent renewals.
This practice in my opinion is deceptive because customers aren’t told. It falls short of community expectations of the kind that the Hayne Royal Commission said we should expect of financial institutions.
If the increase is revealed to customers, as our regulation with require in NSW, they are likely to question the increase, to inhibit the increases, and to shop around.
My directions relate to home and contents and car insurance in NSW but the practice of charging loyalty taxes is widely spread.
In the UK it was found to include mortgage repayments, mobile phone contracts, broadband and other products. In Australia it appears to be a very widespread practice in regard to energy bills and mortgage loans.
It seems unfair that an established customer pays twenty-five percent more than a new customer for identical insurance risk.
The biggest losers are likely to be vulnerable people – elderly people, those with low incomes, those with disability or mental illness or poor English etc.
The amounts of consumer exploitation are very high.
Translating the UK estimate to Australia – the cost to consumers is around $3.6 billion dollars. This is a remarkably high number.