Customer loyalty doesn't pay. Here's why.

Some critics suggest consumers should be more proactive in chasing the best possible deals when renewing contracts such as insurance.

Should service providers give faithful customers the best deal every time, or is it up to customers to shop around when contracts come up for renewal?

At a glance

  • On average, Australian customers renewing their home and contents insurance premiums pay 27 per cent more than new customers.
  • An ACCC mortgage price inquiry estimated that an existing borrower with an average-sized mortgage could initially save up to A$850 a year in interest if they were to pay the same interest rate as a new borrower.
  • According to the Insurance Council of Australia, significant discounts for new customers are simply competition in action, and can encourage customers to compare the value of other products.
  • The New South Wales Government now requires providers to include the price of the previous policy alongside the new premium for all home insurance renewals.

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It’s a national sport in Australia – criticising insurers, banks, energy companies and telecommunications providers for perceived rip-offs.

Is there any merit to suggestions that loyal customers of such institutions may be unfairly slugged with higher fees when they renew policies than those offered to potential new customers?

Allan Fels, the New South Wales (NSW) Emergency Services Levy (ESL) Insurance Monitor and a former chairman of the Australian Competition and Consumer Commission (ACCC), certainly thinks so. His insurance research, for example, found that renewing customers, on average, paid 27 per cent more than new customers for home and contents premiums in a scenario that, he says, amounts to a “loyalty tax”.

“I regard it as somewhat deceptive to lure customers in with a low price, and then not tell them they are experiencing a higher price [when they renew],” Fels says.

The former watchdog boss says the issue is not confined to insurance. Banks, energy providers and telcos are among those who charge existing customers more.

An ACCC mortgage price inquiry in 2018 found that an existing borrower with an average-sized mortgage could initially save up to A$850 per year in interest if they negotiated to pay the same interest rate as the average new borrower.

Such cases prompted the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry to call on the financial sector to have greater respect for loyal customers.

Insurance council defends sector

In the UK, the Competition and Markets Authority, the equivalent of the ACCC, estimated that the total cost of loyalty taxes in five markets – mortgages, savings, home insurance, mobile phones, and broadband – totalled about £4 billion. Fels’s team translated the UK estimate, factoring in population and income differences, to a cost to Australian consumers of up to A$3.6 billion, or at least A$140 a year per person. “That’s a big surplus charge,” Fels says.

However, the Insurance Council of Australia (ICA) rejects such criticism and findings, stating the Insurance Monitor is wrong to label the discounts insurers may use to attract new customers as a loyalty tax.

“Claiming that this costs consumers A$3.6 billion a year is also highly misleading, because the Insurance Monitor admits his figure is based only on surveyed experiences in the UK market, which has different rules, regulations and competitive pressures across a range of non-insurance and insurance products,” says Campbell Fuller, ICA head of communications and media relations.

He says discounts for new customers are simply a case of “competition in action” (see panel). “It may encourage consumers to compare the value of products in the market, and increase the affordability of insurance for some customers,” Fuller says.

“These customer acquisition strategies are common in many industries, including energy retailing and telecommunications.”

The case for government intervention

Gerard Brody, CEO of the Consumer Action Law Centre, believes there is a case for government intervention to protect consumers. He welcomes the recent NSW Government move forcing providers to include the price of the previous year’s policy alongside the new premium price for all home insurance renewals in the state.

“Research shows that this means that consumers are more likely to take action and shop around, if they can easily see how much the renewal gouge is,” Brody says.

He believes similar measures could be adopted in other sectors, and notes the introduction of a default market offer that serves as a price cap for electricity in some states has led to automatic savings on electricity bills (the ACCC puts the average savings at between A$130 and A$430 a year for households).

“This is pretty interventionist policy, but it’s clear that the energy industry has set out to confuse people with misleading discounts, so the regulation is justified,” Brody says.

Fels is concerned, too, that companies will be able to use aggregated consumer data to monitor consumer purchasing habits and “price discriminate” against them. “Where possible, governments should intervene to require business to tell consumers what they’re doing to them.”

Mixed views on fairness

The ICA counters that concerns about the cost of insurance should focus on removal of the “unfair and inequitable Emergency Services Levy in NSW”.

“Recent NSW Government budget requirements have resulted in a sharp increase in the amount of ESL that insurers have to collect on behalf of the government from 1 July 2019,” says Fuller.

“This is resulting in a huge increase in the final amount NSW householders and businesses pay for their insurance. The total amount of tax and levies paid on insurance in NSW is exceeding 50 per cent for typical households for post-1 July renewals, and could pass 70 per cent for many businesses.”

While some critics suggest consumers should be more proactive in chasing the best possible deals, Brody says industries should take it upon themselves to treat customers fairly.

He notes research from Roy Morgan has shown about 80 per cent of consumers do not take the opportunity at renewal time to shop around for car insurance.

“It seems to me that businesses are being quite strategic,” he says. “They are keen to offer ‘good’ prices to new customers, but they know that most of us don’t shop around and will put up with higher charges over time. This is unfair and costs Australians more in basic living costs than is necessary.”

New versus old

The Insurance Council of Australia says insurance premiums may differ between new policies and renewals for a range of reasons, including:

Renewing customers will have their sum insured indexed to protect them from inflation-induced underinsurance, which may affect their premiums.

Insurers may offer discounts to new customers to attract new business and increase market share.

New customers may receive discounts on premiums if they switch several policies to a new insurer.

Most direct insurers offer significant discounts for products bought online.

Customers may change their sum insured to include renovations or new high-value possessions, which may lead to a premium increase.

Customers may change their sum insured in response to building cost increases and underinsurance awareness education campaigns.

Existing customers may also access discounts by bundling products with one insurer or negotiating directly with their insurer when they receive their renewal.

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February 2020
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