Family Money: Loyalty counts for nothing with household bills

If there’s one thing I hate more than being ripped off, it is hearing that my parents have been.

This week, my father and I were discussing MPs’ calls to fast track the energy price cap to stop customers being charged unfairly. The conversation soon turned to our own household bills.

It turned out that my parents, who are in their seventies, pay significantly more than I do for their energy bills. Further investigation revealed they are also paying considerably more for their household insurance and car breakdown cover.

Why? Because they, and millions of people like them, do not switch providers every year under the misguided belief that companies will reward them for their loyalty.

My parents have been with British Gas for more than a decade, and pay about £1,200 per year for the privilege. Yet after a few clicks online, I found they could save nearly £300 if they switched to another provider.

This tallies with research from Which? that found consumers on a standard variable tariff who switched their gas and electricity provider could save up to £312 a year.

Worse was to come. My parents were paying nearly £800 per year for their buildings insurance with Halifax. A quick online search suggested they could get a similar policy for around a quarter of this price. My father proudly said they had been loyal customers of Halifax for 35 years as the insurer had treated them fairly over a claim 20 years ago. It had never occurred to him to “shop around” for a renewal quote or to haggle when his policy came up for renewal.

My parents are not alone in this behaviour. There is a small army of loyal motorists and homeowners who renew their insurance with the same company year after year.

Retailers reward us with loyalty cards, points and discounts. You might therefore think that consumers who stay loyal to their providers would get some form of reward for their commitment. Sadly, they are more likely to have their faithfulness exploited.

Insurers bend over backwards to quote new customers a very attractive premium but once they have caught them, most systematically increase the premium year by year.

The “loyalty penalty” is imposed by most if not all insurers. While there may be a benefit from a no claims discount, this is often wiped out by the rising cost of annual premiums if they stay, even if they have never made a claim.

Again, research by Which? found that those who pushed for a better deal on home, car and car breakdown insurance policies made an average saving of £125 a year.

Actuarial data shows that the longer a customer is with you, the less price sensitive they become. So longstanding, older customers can be charged far more and there is less risk of them switching. This means a customer in their sixties or seventies, say, who has been with the same company for 15 years could pay up to five times what a new customer would be charged for the same level of cover.

What makes me mad is that these renewal premiums and annual increases don’t seem to relate to the cost of providing the cover, but are calculated on the basis of what a given company thinks it can get away with charging.

A new report from Citizens Advice found that customers who stayed loyal to their essential service providers could be paying almost £1,000 more per year in total than those who switched — equivalent to four months’ worth of food for the average household. The report found that charging loyal customers more than new customers for the same service is a common practice across six key markets: energy, mobile, broadband, home insurance, fixed-rate mortgages and savings accounts.

Citizens Advice is calling on regulators to set targets to reduce the number of people who pay the loyalty penalty and to investigate solutions for vulnerable consumers. It found evidence across all six markets that providers were using unfair tactics that took advantage of consumers and even deterred them from finding a better deal.

These included contracts with complex terms and conditions, lack of notice when a contract ends, and financial barriers to exit a contract. It cannot be right that companies routinely use tactics that take advantage of human behaviour — and that regulators are letting them get away with it.

Even if you don’t switch provider, if you obtain a cheaper quote elsewhere most providers will do their best to match it rather than lose you as a customer. Yet according to Which?, four in 10 people say they have never haggled with any service provider. People were the least likely to request a discount on their mobile phone contract, broadband or car breakdown cover.

However much they want to stay loyal, customers should not feel bad about haggling or parting company with providers who offer poor value

People like my parents are put off by the perceived complexity of switching, but in practical terms it is not a big deal. They are computer savvy — although not everybody is, which is why I would urge readers to help their parents and elderly relatives to see what they could save.

I reassured my parents that if they switched energy providers, nobody had to visit their home, and there would be no interruption to their services. The only thing that would change was the price, and the logo on the bill.

Once a switch has been made, the bad news is that you will need to keep switching to stay on the best value deal. Set a reminder a month before the deal runs out, and resist ticking the box to “automatically renew” next year. It is sometimes quite difficult to find the box to uncheck — a little trick providers have “to help you”, or so they claim.

However much they want to stay loyal, customers should not feel bad about haggling or parting company with providers who offer poor value.

I would love to hear about any company that rewards customers for their loyalty. Perhaps, in today’s highly competitive marketplace, such a tactic would help them stand out from the crowd. Loyalty should still count for something, shouldn’t it?

Lucy Warwick-Ching is FT Money’s digital and communities editor. Email: lucy.warwick-ching@ft.com; Twitter: @WarwickChing