CBI Interim Report on Differential Pricing

Tue Dec 15 2020

On 14 December 2020, the Central Bank of Ireland (CBI) published its Interim Report forming part of its review of differential pricing in the home and motor insurance markets which can be accessed here.

Brokers Ireland has engaged with the CBI in relation to its investigation of differential pricing and will continue this engagement in 2021.  The Report found that the majority of insurers apply some form of differential pricing.

Some points of interest include:

  • The market analysis conducted identified weaknesses of varying degrees in insurance providers in scope of the Review, raising concerns that some firms were not adequately considering the effect of their pricing practices on their customers, potentially leading to poor customer outcomes.
  • On average, the longer a customer remains with their insurer, the higher the amount they pay in excess of that required to cover the expected cost of the policy; Firms failed to demonstrate consideration of how pricing practices may impact certain groups of consumers differently, and the potential for certain consumer groups to be impacted more than others.
  • The complexity of insurance means most consumers have a limited knowledge of how the specifics of insurance operates. This can discourage more active involvement and there is a tendency to feel it is better and easier to stay with the current insurance provider rather than switch;
  • The CBI has said that it requires insurance providers to address issues relating to governance and oversight of their differential pricing practices, to ensure that they understand the impact of such practices on their customers and that they have a fully embedded Consumer Protection Risk Management Frameworks to drive positive behaviours.  On conclusion of Phase 2 (of the CBI investigation), consideration of the likely costs and benefits of any potential solution to risks identified is essential, with appropriate consideration given to market and consumer price effects. Once this work has concluded the CBI will publish a report and/or a consultation on proposals for reform, as appropriate, in 2021.
  • Customers may not always be aware of price differentiation or, even if they are, they may not engage in sufficient search and negotiation to avoid it. This can result in adverse effects for consumers, particularly if the tendency to engage in effective search and negotiation is less likely with customers who have characteristics of vulnerability (e.g. age, income or financial capability) or have behavioural biases that create barriers to customer engagement.
  • From the Review, it is evident that the majority of firms apply some form of differential pricing.
  • In general, renewing customers are paying significantly more than the expected cost, while new business customers are paying marginally less than the expected cost.
  • For private car insurance, the average Technical Premium is considerably lower for renewal compared to new business. However, for renewal business, while the average Technical Premium decreases, the average Actual Premium decreases to a lesser extent, resulting in a higher Actual Premium being charged relative to the Technical Premium (or expected cost). In other words, even though the price they pay upon renewal may be reducing, the policyholder is paying a higher premium relative to the expected cost of the policy.  As a result, renewal business experiences a higher APTP ratio compared to new business.
  • In relation to home insurance, despite the expected cost (Technical Premium) of renewal business being marginally lower than the expected cost of new business, the Actual Premium charged to renewal business is significantly higher than the Actual Premium charged to new business, resulting in a higher APTP ratio for renewals. The CBI observed that the average premium charged in 2019 was 29% higher for renewal business than for new business, despite the expected cost of renewal business being 6% lower than new business. The consumer research, as set out in Section 5 of the Report, showed that there is a much higher level of inertia with home insurance than with private car insurance, which may be a factor.
  • Insurance providers may offer discounted prices to prospective new business customers in order to secure their business. Insurance providers may adopt this approach in order to secure business with a view to retaining this policy over a number of years, and recouping the discount provided at new business over the lifetime of the policy. This results in renewal customers subsidising the premium of new business customers.
  • Insurance providers may offer discounted prices to prospective new business customers in order to secure their business. Insurance providers may adopt this approach in order to secure business with a view to retaining this policy over a number of years, and recouping the discount provided at new business over the lifetime of the policy. This results in renewal customers subsidising the premium of new business customers.
  • The CBI’s consumer research showed that consumers typically take no action when the premium remains similar to the previous year. Consumers feel that their insurance providers are treating them fairly with regard to price, and this typically reinforces inertia.
  • An increase in premium charged, year-on-year, for renewal business for reasons other than risk and cost of service may be referred to as price walking. This may be viewed as a loyalty penalty, where customers are charged a higher amount as their tenure increases. Analysis of the data suggests that there is a correlation between age and tenure, where older customers tend to have higher loyalty years. Therefore, loyalty penalties appear to disproportionately affect older customers. Further analysis is in progress to identify the underlying characteristics of those customer groups that are most affected by differential pricing. In relation to both the private car and home insurance markets, as a customer’s tenure increases, the extent to which they subsidise new business customers’ premiums increases.
  • The renewal customers are subsidising the new business customer. As the renewing customers’ tenures increase, the extent to which they subsidise the new business customer increases.
  • Insurance intermediaries may have the ability to optimise retention or profit using differential pricing models. For example, they may identify policies that are less likely to convert or renew and offer these customers higher discounts; for policies that are more likely to convert or renew, the insurance intermediary may offer smaller discounts, if any.
  • On average, renewing customers pay a higher amount relative to the expected cost of their policy when compared to new business customers. The CBI also observed that, on average, the longer a customer remains with their insurance provider the higher the amount they pay in excess of that required to cover the expected cost of the policy.
  • While the majority of firms have developed pricing policies, they have not sufficiently considered the impact of their pricing practices on customers.
  • Firms failed to demonstrate consideration of how pricing practices may impact certain groups of consumers differently, and the potential for certain consumer groups to be impacted more than others. While it is evident that firms monitor metrics relating to the treatment of customers including: complaints; customer feedback; and quality control checks of customer engagements, there is minimal evidence to suggest they are monitoring the impact of pricing activities on consumers.  Failure to have appropriate frameworks and controls in place prior to the implementation of differential pricing practices results in insurance providers being unable to effectively monitor the impact of their pricing activities and unable to evaluate how their pricing decisions affect customer outcomes.
  • The majority have not undertaken any specific monitoring of fairness in respect of customer outcomes from their own differential pricing practices.
  • While it was evident that a small number of firms had commenced work to further develop their pricing policies, standards across the sector were not satisfactory.
  • In the majority of firms, the information provided to customers, and the requirement for customers to proactively engage with firms following receipt of their renewal invitation in order to negotiate a better price, was not adequately considered in the context of customer outcomes.  In order for a customer to be able to make an informed decision in respect of their private car or home insurance policy, documentation and information provided to them must be clear and transparent.
  • While the majority of firms have developed pricing policies, firms were unable to provide sufficient evidence of a consumer-focused culture in respect of pricing decisions and practices.
  • Failure to ensure that customers are at the centre of pricing decisions raises questions regarding how customers’ interests are considered as part of the pricing process and creates significant concerns in respect of a firm’s culture.
  • Initial consumer associations with insurance include complexity (details are hard to understand, lots of jargon); and expense (limited sense of value for money; intangible benefit).  CBI research shows that the complexity of insurance means that most consumers have a limited knowledge of how the specifics of insurance operate.  As many consumers view insurance as difficult and boring, this can discourage more active involvement
  • For some consumers who use insurance intermediaries, their relationship with their insurance intermediary dominates their insurance experience to the extent that they may find it difficult to recall the brand name of their current insurer (but can remember the name of their insurance intermediary). In some cases, the insurance intermediary is also a face-to-face point of contact (town, local office etc.) which provides a greater sense of comfort and of someone acting in an expert, intermediary capacity. CBI research found that consumers using insurance intermediaries typically accept advice and administration charges with limited questioning. Consumers see the insurance intermediary as a way to ‘sensibly delegate’ their choice of insurer and cover. By doing so, consumers believe it saves them time each year.

Brokers Ireland will ensure that the interests our members are fully represented on this important and topical issue and will keep you informed accordingly.

Kind Regards

Cathie Shannon

Director of General Insurance

Brokers Ireland

 


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