Why insurance could get cheaper for 10 million Australians

You could be saving 25% on your car, home and contents insurance from July 1. How? You will have crucial comparative information that will alert you to see that your insurance company has sharply increased your premium and it should prompt you to shop around for a better deal.

There is a golden rule when renewing your car or home and contents insurance. Rather than just paying it, check how competitive your premium is.

One way is to put in the address next door to see what the rate is. You could be in for a surprise.

In a win for New South Wales consumers, from July 1, insurers must display last year's premium on renewal notices for car, home and contents insurance.

Knowing the price increase from the year before will benefit more than 10 million households, according to Allan Fels, the NSW Emergency Services Levy Monitor and a former insurance monitor in Victoria.

Why is it a significant move for consumers and small business?

A study conducted over several years by the Insurance Monitor found consumers renewing insurance in year two pay 25% more than new policyholders. For the last quarter the increased premium was 34%.

Fels says: "Until now, insurance notices normally have not stated what the previous year's premium was. Accordingly, consumers and small business owners don't know how much the premium has gone up.

"Most are victims of a loyalty tax - that is, they pay far more in years two, three, four, five and so on, than in year one. And most people don't know it," says Fels, who was a former chairman of the Australian Competition and Consumer Commission.

He adds the loyalty tax occurs when discounts are offered to attract new customers but premiums are increased at the first and subsequent renewals.

For example, if the policy in year one costs $1000, in years two and later years, it would typically be $1250 to $1300 dollars. For an initial premium of $2000 it would be more than $2500.

"The practice is deceptive because customers aren't told. It falls short of community expectations, of the kind the Hayne Royal Commission said we should expect of financial institutions. It seems unfair that an established customer pays 25% more than a new customer for identical insurance risk," says Fels.

He says if the increase is revealed to customers, they are likely to question the increase and to shop around.

While the biggest losers are likely to be vulnerable people - elderly people, those with low incomes, those with disability or mental illness or poor English, Fels says the practice is so widespread that most customers lose.

He adds while these changes are to home and contents and car insurance in NSW (but potentially spreading to the rest of Australia), the practice of charging loyalty taxes is widespread, including in other areas of insurance.

"In the United Kingdom it was found to include mortgage repayments, mobile phone contracts, broadband, energy and other products. In appears to be a very common practice in those products and others in Australia," says Fels.

"The extent of consumer exploitation is very high. Translating the UK government estimate to Australia, the cost to consumers is about $3.6 billion a year."

Fels says research in NSW and Victoria 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 we repeat this in 12 different areas. The variation is about 2.7 times. That is, the quotes range from say $1000 to $2700 for the same house and contents at a specified address," says the Insurance Monitor.

While consumers have to shop around for several quotes and it is inconvenient to change insurers, the good news is that the payoff is large, explains Fels.

The reasons why there is a huge difference in prices are because the industry is quite concentrated, consumers are not well informed, and it is time-consuming and costly to switch.

Fels says he hopes federal and state governments will act to ensure consumers are fully informed about the loyalty taxes they pay and that it is made easier for them to challenge and change suppliers.

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