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Penalised for being loyal to your Insurer?


When was the last time you reviewed your insurance, mobile or even broadband plans? Over time, new plans are continuously introduced by service providers to attract new customers, rendering your existing plans outdated and less advantageous. Without proper attention, you might find yourself subject to “loyalty penalty”, a concept recently discussed in the UK market.

Loyalty Penalty” in a nutshell

The term loyalty penalty is a relatively new term that emerged in the United Kingdom (UK). It highlights the pricing disparity between loyal, long-term customers and new customers for the same services. In the case of loyal customers, their loyalty often results in a disadvantage as service providers frequently prioritize new customers with more favourable deals. A parallel can be drawn between this term and the notion of "middle child syndrome" where both situations involve individuals experiencing neglect or being overlooked.

While the term may be relatively new, the concept itself is not unfamiliar. Here in Malaysia, I've observed similar disparities in various sectors, including but not limited to the mobile and broadband markets. Fuelled by a competitive market, service providers often engage in price competition, yet customers on "rolled over" contracts are frequently unaware of new, more favourable plans. This situation results in them paying higher prices for inferior plans compared to new customers.

In 2018, the UK's Competition and Markets Authority (CMA) conducted an investigation into the presence of a loyalty penalty affecting British consumers across various markets including the mobile, broadband, home insurance, mortgages and savings markets. This inquiry was initiated in response to a super-complaint made by the Citizens Advice Bureau. The CMA described the issue as follows[i]:

“In some markets, longstanding customers can pay much more than new customers for the same services – this is known as the ‘loyalty penalty’. This happens when suppliers charge higher prices to their existing customers, who they think are unlikely to switch to get a better deal. The result is that in many cases, people who stay with their supplier end up paying significantly more.

Many services are paid for through automatically renewed or rolled over contracts. While this can be convenient for customers, it also increases the risk that customers who get rolled over year after year will pay a loyalty penalty […] Overall, we have found that the loyalty penalty is significant and impacts many people, including those who can least afford it. Customers rightly feel ripped off, let down and frustrated. They should not have to be constantly ‘on guard’ or spend hours negotiating to get a good deal. This erodes people’s trust in markets and the system as a whole.”

Loyalty Penalty in the context of medical insurance

In the lead-up to 2023, I maintained a medical insurance plan, requiring a monthly payment of approximately RM300.00, affording an annual coverage of RM200,000.00. My association with this plan commenced around 2016, a time when it was considered among the more robust options available, and it was facilitated through Insurance Company A.

Sometime this year, my wife, who had never held medical insurance before, embarked on a mission to find an appropriate plan. We initiated a search for the most appealing options offered by various insurance companies. In response to a recommendation, we contacted multiple agents representing different insurance providers. They readily agreed to meet with us, offering a detailed overview of the available plans and the benefits they offered.

The revelation of the current insurance landscape left me astonished. The available plans, even from Insurance Company A, now offer considerably more extensive annual medical coverage while keeping the monthly cost at RM300.00. To put it in perspective, a basic plan at RM300.00 with Insurance Company A or its competitors can now provide medical coverage exceeding RM1,500,000.00 annually. My reaction was a blend of shock, amazement, and disappointment, as I had never been informed by my existing insurers about these superior alternatives. At that moment, I couldn't help but contemplate the possibilities, realizing that I could have easily upgraded to coverage reaching RM2,000,000.00 per annum at the same cost.

Examining these new plans, it became apparent that my loyalty, having maintained coverage with Insurance Company A for over seven years, was essentially resulting in a form of 'penalty.' I had to come to terms with the reality that a new policyholder could secure ten times the coverage benefits for the same monthly payment that I had faithfully made to my insurer over seven years. If this doesn't exemplify a loyalty penalty, I'm not sure what does.

The questions swirled in my mind: Why was I not apprised of these improved plans? Do insurers bear an obligation to notify policyholders of revised offerings? Am I entitled to an upgrade?

Naturally, these insurance agents strongly advocated for me to enrol in new policies with their respective companies, highlighting the substantial disparity in coverage. Their determination and enthusiasm to secure my enrolment are, of course, driven by the fact that insurance agents have a vested interest in the commissions earned from new policies over an extended period. However, despite their convincing sales pitches, there was a notable absence of information regarding whether my current insurers could offer a comparable level of coverage to what was available through their companies.

In my quest for clarity, I reached out to an agent for Insurance Company A. An experienced professional, he pointed out that I could attain improved coverage by upgrading my policy within the same company. When I questioned why Insurance Company A hadn't made me aware of the significant coverage changes, he remained silent on the matter.

After considering the proposition to upgrade my current plan, it was evident that the proposal from my current insurers surpassed those from their competitors. The question arose: Why?

As I had initially acquired the policy back in 2016, more than seven years have elapsed, which means that the agent who originally enrolled me had already received their full commission before 2023. Consequently, no new insurance companies could offer me a more favourable deal than my current one, as these new insurers had to factor in commissions for their agents. It was a clear-cut decision, and I opted to improve my existing plan. Although I found the upgraded plan to be satisfactory, there was still a lingering sense of disappointment regarding the lack of transparency within the insurance industry. What if I had experienced a severe accident or been diagnosed with a critical illness before upgrading? Given today's escalating medical costs, a coverage limit of RM200,000.00 would barely cover the expenses necessary to make it to the operating table.

Why does this happen?

The loyalty penalty arises because numerous insurance companies utilize introductory or promotional rates to entice new customers. These initial rates are frequently lower than what existing policyholders are charged. As time progresses and policyholders renew their insurance, the premiums incrementally rise, further widening the gap between what loyal customers pay and what new customers are charged. In some instances, this discrepancy can lead to a substantial difference in premium costs. This practice has raised concerns among consumer advocacy groups and regulators, as it can lead to increased expenses for long-term policyholders who might not be aware that they could obtain the same coverage for a lower cost if they were informed about the changes in available plans, rather than resorting to switching to a different insurance provider.

To address this issue, some regions and regulatory bodies have taken measures to increase transparency and require insurers to clearly disclose how premiums change over time. Additionally, they may encourage insurers to offer more competitive rates to existing customers to reduce the loyalty penalty. For example, the UK’s Financial Conduct Authority (FCA) has been taking measures to address this issue, including proposing rules and regulations to make pricing fairer for both new and existing customers. They have introduced reforms to make it easier for consumers to understand the cost of insurance and banking products and to switch providers if they choose to do so[ii].

So why aren't Malaysian consumers provided with guidance or notifications about the improvements in medical coverage limits? Could it be that an insurance agent, having already received their full commission within the initial five years of your policy, lacks the motivation to propose an improved plan due to the absence of additional earnings? Alternatively, might it be that insurance companies prioritize attracting new customers, potentially neglecting the needs of their existing policyholders with older plans? At this juncture, the list of questions surpasses the number of clear answers, and I abstain from making speculative assertions.

I understand that service providers, in general, may hold an opposing viewpoint, suggesting that these improved plans are readily available on websites and social media, allowing customers to make their own choices. However, I find this response unsatisfactory because not everyone has internet access nor the time to constantly research or explore these new offers. Interestingly, a slight delay in paying your monthly bill to your service provider consistently prompts a timely payment reminder. If service providers can exhibit this degree of efficiency in reminding us to pay our bills, I believe they can apply the same efficiency to educate us about obtaining the most advantageous deals, whatever they may encompass.

Drawing from the aforementioned recent experiences, I now find myself periodically conducting searches to discover potential improvements I can derive from service providers. Therefore, if you are presently reading this, I wholeheartedly recommend not only revisiting your existing plans but also exploring the latest offerings, irrespective of their nature, and fully capitalizing on the advantages offered by your insurance company or service providers.

Undoubtedly, the necessity for industry reforms in Malaysia remains unquestionable.

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