Opinion: Has brand stacking replaced the loyalty penalty?

By editor Katie Scott

The motor and home markets have come a long way since the FCA first started digging around these lines of business, publishing its findings on the loyalty penalty in September 2020 before moving to ban the practice following a policy statement in May 2021.

The loyalty penalty refers to situations where insurance firms offer new customers more competitive premiums compared to existing customers, despite both consumers looking to insure the same risk.

The FCA sought to eliminate this from insurers’ playbook through its fair value and Consumer Duty regulations, effective from January 2022 and July 2023 respectively.

Although many market commentators were pleased to see such action, James Daley, managing director of Fairer Finance, recently explained to me some of the unintended consequences resulting from the regulator’s new tranche of rules.

In his opinion, eliminating the loyalty penalty was a heavy-handed tactic that has caused the rise of brand stacking – where insurance firms adopt three or four sub-brands that all provide different tiers of cover.

In effect, a previously comprehensive product is stripped back in varying degrees and provided at increasingly cheaper prices, hoping to offer consumers a premium they can afford.

According to Fairer Finance, these so-called ‘essentials’ products typically cover more than third party, fire and theft policies as they often include accidental damage – however, they also “cut out features that are included in the average car insurance policy”, such as windscreen cover, stolen key replacement, courtesy cars and the uninsured driver promise.

The firm noted that many insurers are, therefore, “committing the sin of omission” by not clearly detailing what features are not included in essentials products, suggesting that consumers may assume they have cover in place when, in fact, they don’t.

“This situation raises the question of whether there should be a minimum standard for comprehensive policies, to prevent insurers from continually stripping features back to bring down price,” Daley said.

“Transparency about even minor changes in coverage limits is essential to reduce the complexity of car insurance and prevent consumer misunderstandings.

“Brand stacking is designed to ensure [insurers] can keep their [names] at the top of the price comparison charts – but it makes choosing the right policy all the more difficult for consumers.

“There’s no standard definition of an essentials policy, with some insurers stripping out windscreen cover, while others have raised excesses, or removed cover for lost or stolen keys.

“Since many customers will opt for essentials cover due to the lower price, it is vital for insurers to be clear about the exclusions and limitations of these policies.

“People need to understand these restrictions at the time of purchase, rather than at the time of making a claim. Customer trust will only further erode if the industry doesn’t address this.”

It’s an interesting stance – that by removing one problematic facet around pricing, another has instead reared its head.

If consumers are as unaware of the limitations around essentials products as Daley suggests, then greater transparency on brand stacking may be something the FCA will want to combat under its Consumer Duty protections.

However, considering many consumers are still stricken by cost of living implications, greater understanding and awareness of their coverage options still may not affect their choice of product.