The true cost of not shopping around for car and home insurance

We show you just how much more you're paying - and how much value you're losing - when you don't shop around for insurance.

When it comes to both car insurance and home insurance, it's obvious that loyalty doesn't pay. Just look at the difference in premiums for new and existing customers. I'll show you the huge price gap in this article. However, I have even more evidence that you don't get value for money if you fail to shop around every year.

Your reward for a bit of effort

The AA keeps a benchmark of car insurance prices. Using its data, as well as facts from the Association of British Insurers (ABI), I estimate that the average comprehensive policy costs around £1,250.

I can also estimate that the average 'shoparound' price is approximately £850. This estimate roughly takes into account the fact that you don't always buy the cheapest possible quote, but the cheapest one that meets all your requirements. For those who just want the cheapest comprehensive policy possible, the average price through comparison sites is just £680.

This means that those car insurance customers who shop around every year, instead of sticking with their existing insurer, could save more than 30% on average, and perhaps a lot more.

It's clear that insurers discount new policies to extreme low prices in order to reel in new customers, but they intend to make it back later. They do this partly through cross-selling other insurance products, but also in making you pay a higher price than new customers in future years.

What loyal customers are paying for

I'm going to teach those of you who shop around to suck even more eggs now, but I think the following extra information helps to demonstrate even better the value in comparing prices once a year.

Let's say that car insurance customers who don't shop around collectively pay £10 billion in premiums. By my best estimate, using ABI data, these customers are only collectively being paid back about £6.2 billion in the form of honest claims. This is OK. It's a better payback than many insurance products, but it's not fantastic.

However, you get much better value if you shop around every year. Let's say that customers who shop around collectively pay around £4 billion in insurance premiums. By my best estimates, these customers are collectively getting back virtually all of this £4 billion in honest claims payouts. Now that's value for money!

Home insurance is a similar story

The average buildings and contents policy costs about £310, whereas the shop around price is £240.

Let's say again, for convenience, that customers who don't shop around pay £10 billion collectively for their insurance. I estimate that the best they can collectively expect to get back is about £5.5 billion to £6 billion in legitimate claims in an average year. This estimate is based on the five years to 2010, which includes years with some heavy flooding and storms, and therefore some heavy payouts. Worse, it is likely to be an overestimate.

Compare this to those of you who shop around. Let's say you collectively pay £1 billion for your home insurance. You could be getting up to £700 million, or 70%, of this back in claims payouts. This is also likely to be an overestimate, but it is still now reaching price territory that is of reasonable value to the customer.

Watch the add-ons

To better ensure you're getting value for money, only buy the cover you really need. For each feature you consider paying extra for, think about how much it would cost to pay for the claim yourself and whether you could easily afford it out of your own savings, and how you'd feel emotionally when doing so. If you would cope well, it's likely the insurance isn't worth it for you. You can read more about the different features of car and home insurance policies in Essential car insurance features and Home insurance: the features you can't do without.

Add-ons such as legal insurance and home-emergency cover are areas where insurers can massively boost their mark-up, but that in turn decreases the value you're getting. Read more on this in The next big financial scandal.

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