Insurance ‘loyalty tax’ adding nearly 15 per cent to premiums, new research finds

A “loyalty tax” that adds $100 or more to insurance has been exposed for the first time. Longstanding policyholders are paying nearly 15 per cent more than new customers.

EXCLUSIVE

A “loyalty tax” that adds $100 or more to insurance has been exposed for the first time.

Longstanding policyholders are paying nearly 15 per cent more than new customers.

What’s more, in attempting to downplay this fee for remaining faithful, the industry has inadvertently revealed it is now using sophisticated computer algorithms to alter pricing based on the likelihood someone will leave in response.

The experts who have identified the imposition of a loyalty tax on home insurance say the practice is widespread, economically harmful and unfair.

“This is quite a common feature right across the industry nationally,” said Professor David Cousins, who is NSW’s government-appointed Insurance Monitor along with Professor Allan Fels.

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Who is being ripped off and who is getting a good deal? Picture: AAP Image/Dave Hunt

Analysis for them of the top 10 insurers shows renewing customers are paying 14.5 per cent more per $1000 of cover.

On a $500,000 policy this would add about $100 a year to premiums.

Professor Cousins urged consumers to fight back by comparing rival offers every time a renewal notice was received.

“Our message is you’ve really got to shop around,” Professor Cousins said.

He suggested customers go back to their existing insurance provider and confront them with the information gathered.

“It typically changes their tune,” he said.

Insurance Council of Australia communications manager Campbell Fuller said cover providers may offer discounts to new customers to attract new business and increase market share.

“This is competition in action and may encourage consumers to compare the value of products in the market, and increase the affordability of insurance for some customers,” Mr Fuller said.

He said new customers may purchase multiple policies and may have bought online, which is a lower-cost sales channel.

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Understanding what constitutes good value is getting harder. Picture: iStock

Mr Fuller said insurers employ “a variety of pricing methods that are used in many industry sectors in Australia and around the world to help determine what a company will charge customers for its product or service”.

And he said “non-insurance firms routinely use sophisticated computer algorithms to help determine pricing structures”.

Asked whether Australian insurance firms do the same, Mr Fuller said “you’ll need to check with each insurer”.

But professor Cousins said the Council the comments were an admission insurers also use algorithms to set prices not just on risk but on the likelihood a customer will leave.

“That’s the essence of what we are talking about here: they are price discriminating between new customers and renewing customers,” he said.

NSW Minister for Better Regulation Matt Kean said: “Loyal customers should be rewarded, not ripped off by their insurance providers.”

NSW Minister for Better Regulation Matt Kean. Picture: AAP Image/Dean Lewins

Loyalty taxes have been identified in banking, with existing home-loan customers paying more.

And the Federal Government has recently attacked electricity retailers for rapidly increasing base prices paid by customers who haven’t reviewed their plans.

Customers should soon get a heads-up about a potential rip-off with a new general insurance code of practice likely to include a requirement to provide last year’s premium on a renewal. At the moment that’s not mandatory.

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