Is complacency costing you thousands?

There’s nothing like a pandemic to spike a renewed interest in life insurance. And there’s nothing like a warning from an eminent Australian to beware the cost of your assorted insurances to spark a fresh wave of queries.

Professor Allan Fels, former head of the Australian Competition and Consumer Commission (ACCC) and now NSW Emergency Services Levy Monitor has, in recent years, dedicated part of his time to lifting the lid on insurance price gouging. Unfortunately for us all, that is about to come to an end. His commission – to track insurance costs across regions of New South Wales – ends this month. But the legacy of his work is profound, putting a dollar figure on how much extras premiums are costing lazy or ignorant consumers. 

In NSW, his team compared what 13 insurers charged across 11 locations on a monthly basis and then analysed the data.

His brief was to make sure insurance companies did not charge unreasonably high prices or mislead policy holders.

However, his research found that on average, customers renewing their insurance policy without shopping around paid 27 per cent more than new customers. He labelled this practice the ‘loyalty tax’.

“Our most recent data indicates the gap has risen to 34 per cent,” he said. “This translates to hundreds of dollars for the average home and contents insurance policy.

“In Britain, regulators have calculated that customers are, by their fifth renewal, paying about 70 per cent more than a new customer. The Competition and Markets Authority estimates the total cost of loyalty taxes in five British markets – mortgage, savings, home insurance, mobile phone contracts and broadband – to be about £4 billion (about $7 billion) a year.

“Translating this British estimate to the equivalent sectors in Australia (taking into account differences in population and GDP), the cost to consumers could be as high as $3.6 billion, or at least $140 a year per person. This estimate does not include the energy sector, where evidence suggests the practice of charging longstanding customers more is rife.”

Despite his work, Prof. Fels said consumer awareness of the loyalty tax appeared to be low.

The Emergency Services Legacy Monitor’s final survey, obtained by The Sydney Morning Herald and The Age, proved the economic sense in shopping around for home insurance. It reported:

  • In Hornsby, NSW, for example, policyholders who switch from the most expensive premium to the average premium could save $470 a year, while those who switch from the highest to the lowest price quoted would save about $1200 a year.
  • On average, the most expensive home insurance policy at each location tested is more than twice the price of the cheapest policy. In Hinton, NSW, the most expensive premium is more than six times the price of the cheapest available.
  • CommInsure, QBE, NRMA and OnePath were consistently the most expensive insurers in the 11 postcodes tested in March, while Youi, Westpac, Woolies and Allianz were consistently the cheapest.

Loyalty is not rewarded in the insurance sector, Prof. Fels said.

“Discounting to win new customers is not fair if the costs of that discount are not passed on to longstanding customers. It discriminates against people who do not or cannot easily switch to another supplier. Vulnerable consumers – elderly consumers, those on low incomes, low education, or those with a disability – are disproportionately affected.”

Prof. Fels said many consumers had likely been unaware they were paying more each year for their premiums until he was able to introduce a requirement that insurers display last year’s premium on the renewal notices to policyholders. That is now a nationwide practice and the information makes it more likely consumers will query any annual increase.

“If you are not happy with the increase, or the explanation for it, you should shop around and reassess your options,” said Prof. Fels.

“You will need to get a couple of quotes. Our research shows major variations in insurance quotes for identical homes with identical risks. Every quarter we seek quotes for a specified home with identical risk, and the highest quotes are up to 2.7 times that of the cheapest.”

Prof. Fels said that despite the work of his monitoring team, more had to be done. While there were lots of brands to choose from, the market was highly concentrated and not particularly competitive. Like the banking industry, there were just four major players, he said.

The larger problem, however, was on the demand side. “Consumers are generally not well informed. The complexity of products and the large amount of fine print in contracts makes it hard for customers to tell if they are getting a fair deal. Once they’ve made a choice, most will not think about switching, because it’s time-consuming, costly and inconvenient.”

In other insurance news, new research from MetLife found one in four Australians, or 28 per cent, had investigated life insurance since the outbreak of COVID-19.

The report said consumers were also actively thinking about their superannuation, with two-thirds (66 per cent) still wanting to hear from their fund about their investments and what they could do to protect their super.

MetLife Australia group insurance chief James Carey said the spike in interest was understandable given the ongoing stress caused by COVID-19.

“Our research found that half of Australians claim COVID-19 has had a negative impact on their personal finances,” Mr Carey said.

“Although the number of people reporting a ‘very negative’ impact has eased since March, there is still a lot of uncertainty when it comes to job security and financial wellbeing.”

He said that while it was encouraging to see so many Australians take active steps to secure their financial situation, the increase in inquiries suggested many consumers did not fully understand what was and wasn’t covered by different insurance products.

This was an important opportunity for financial providers to educate consumers to ensure they had the right protection for their situation, he said.

Do you reassess your assorted insurance premiums each year? Do you know if you are being penalised for being a loyal customer?

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Written by Janelle Ward


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