Money: Counting the cost of loyalty

It's common to shop around for car or travel insurance, but few people check out deals available on home and contents insurance. You could be paying a lot more than you need to.
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It has taken a few years to happen. But for any motorist, the notion that you must be prepared to shop around in order to find the best deal for your car insurance deal is now deeply ingrained. Strange then that the same concept does not appear to have taken hold where home and contents insurance is concerned.

Most homeowners still tend to stick with their banks and building societies when it comes to arranging cover on their properties. Indeed, according to estimates from Direct Line insurance - the telephone broker trying to break this cozy arrangement - banks and societies are still creaming pounds 750m in commission in this area, despite being profoundly uncompetitive in many cases.

Adrian Webb, spokesman for Direct Line, says: "Mortgage lenders make huge commissions at the expense of homeowners by bundling together insurance cover with mortgages."

Mortgage lenders have a massive advantage over insurance companies when it comes to selling building and contents cover. As Mark Bishop, at Cornhill Insurance, says: "When the banks and building societies have someone sitting down with them arranging their mortgage, they have a captive customer."

This means that mortgage providers can at times get away with charging more - and boosting their commissions - because the customer is unlikely to check out competitors deals.

Despite the claims, lenders deny they are out to rip off their customers. As far as they are concerned, their packages are designed to meet every home-buying requirement. A spokeswoman for Nationwide Building Society says: "We are here to provide a service for our customers and this includes policies to meet their needs."

Abbey National states: "We try to give the customer the best package we can. It is not just price that is important, but the quality of cover. It is undesirable if the customer is offered no choice. Abbey National does not enforce packages on the customers, and there are different products if one is not suitable."

Yet, if consumers freed themselves from the embrace of mortgage lenders they would find that the market in buildings and household cover is extremely competitive. Most would find no difficulty in arranging cheaper insurance.

Alex Lovesey, at Hill House Hammond, the national insurance intermediaries, says: "People often think they've got to stay with their mortgage provider. This isn't the case and if you do shop around you may save an awful lot of money."

Mr Bishop, at Cornhill, adds: "It is a vibrant market in terms of the number of players out there and everybody is fighting hard to maintain business and to grow. This is proving hard to do in the current competitive market."

The result is that no insurance company can afford to go out on a limb and increase their premiums by any great margin. Many are still cutting the cost of cover rather than increasing it.

June Price, spokeswoman for Swinton Insurance, makes the point that, if you have had the same home insurance cover for a while, you may be missing out on new products. She says: "New products may have cover that is more relevant today than policies from 10 years ago. For example, cover for items such as home computers."

However, when shopping around it is important that you do look beyond price. Jill Peacock, from Norwich Union, says: "You should not just shop around on price. Some policies may seem cheap, but there may be hidden limits within them. For example, the contents of your house may be insured for the sum of pounds 35,000 but have a limit of pounds 7,000 on valuables."

If you are unsure about buying buildings and household cover, insurance brokers and intermediaries can be a good option. They have the advantage of being able to shop around to find the best deal for their client, both in terms of price and the type of cover that best suits that customer. This is opposed to the direct insurer, which may only have one standard policy on offer. Ms Peacock from Norwich Union points out: "Intermediaries are able to advise on different aspects of the cover which the customer is unsure about, for example, how much the [amount] for buildings and household contents cover should be."

When calculating premiums, the key factor an insurer will take into account is your postcode. This is to determine the history of the area in terms of risk, including flooding, subsidence (especially prevalent in areas of clay soil) and crime rates.

Insurance companies now use refined technology which can narrow areas down to the last numbers of the postcode, equivalent to 10 to 20 houses. If you live in a high-risk area, you cannot transplant your house. However, there are a number of things you can do to lower costs.

The AA, which acts as an insurance intermediary, recommends the following measures:

t Fit a smoke detector.

t Fit locks on windows and doors.

t Install an approved burglar alarm.

t Keep claims down for a higher no-claims discount.

t Keep valuables down to a minimum.

t Keep the house in good repair.

t Avoid planting trees close to the house (to reduce risk of subsidence).

t Opt to pay the first pounds 100, say, of any claim.

If you are a regular Internet user, you may soon be able to use this as a cheap way to take out cover. A recent survey by Datamonitor found that one in five consumers, and one in four men, would be willing to use the Internet in this way.

Mark Bishop from Cornhill says: "More and more insurance companies are thinking of the Internet as a tool to get business away from their competitors. I think we will see a growth in that in the next 12 to 18 months."