Insurers have been in the spotlight recently in connection with dual pricing. This is when the same risk is priced differently for new customers and existing customers. So what are the ethical issues raised by dual pricing?
Let’s put dual pricing in context first. Insurance is a market like any other and providers to that market are free to set their own prices. One element of a confident and thriving market is the reasonable prospect of providers earning a reasonable return on investment and every underwriter will set their rates with an eye to their portfolio’s contribution to their firm’s ROI. At the same time, each provider will have a strategy for acquiring and retaining particular segments of business across different distribution channel.
And we shouldn’t forget about the consumer, who is free to choose from a wide range of providers, both at inception and renewal. Consumers may not enjoy buying insurance, but they know that in most cases, they do need to.
Given that market context, does dual pricing come with any ethical issues attached? Let’s look at two that tie in closely with how dual pricing works.
Firstly, dual pricing relies on information asymmetry between insurer and consumer: in other words, existing customers not knowing a) how the price for their policy was arrived at and b) what other customers are being charged for a comparable risk. Without that asymmetry, consumers would have the knowledge and incentive to shop around and find the best deal, based on their personal preference for cover and price. That makes for an efficient and effective market, so when that asymmetry does exist, it puts the public’s confidence in a market at risk. Dual pricing is an indicator of an inefficient market, which if were to be exploited, could undermine confidence in the market and risk triggering all sorts of regulatory interventions.
Clearly, it can sometimes be a challenge to achieve pricing consistency across an insurer’s full range of brands, products and distribution channels, so some pricing variations are to be expected. However when those variations can be measured in multiples of renewal premiums over inception premiums (such as in this news item), then it looks like either the insurer isn’t trying or else is exploiting that information asymmetry in the hope that new business will exceed lapses.
Exploiting a market inefficiency such as information asymmetry undermines an insurer’s credibility for acting with integrity. If the practice is well established in a market, it could have all sorts of unintended consequences (see below) and have all sorts of repercussions for the sector’s reputation. Given that transparency is clearly on the regulator's radar at the moment (see this discussion paper), now hardly seems the right time to be exploiting information asymmetries in this way.
The second point that’s worth highlighting is the knock on effect dual pricing could have on trust in the insurance sector and the perceived value of what is being sold. As a ‘promise to pay’, insurance relies a great deal upon the trust consumers have in the sector. If consumers see a disconnect between one message saying ‘buy on cover as much as price’ and that other message sent out by dual pricing, then trust will be undermined. Consumers will question not only their renewal premiums, but also the cover being provided. So the more an insurer exploits information asymmetry through dual pricing, the more it is tilting its products towards being a price driven purchase. That’s a downward spiral many in the sector are seeking to steer out of. To succeed, they will need to get their messaging much more consistent.
Duncan is the founder of the Ethics and Insurance blog and the author of its many posts. He's a Chartered Insurance Practitioner, having worked 18 years in the UK market. As an adviser to many firms on ethics issues, as well as a regular conference speaker, he is one of the leading voices on ethics and insurance.