The two main trade bodies for UK insurance firms have adopted a set of guiding principles for the pricing of several types of personal insurance. It’s long overdue recognition that the market has a pricing problem. Yet do these pricing principles offer the necessary commitment to drive change on a well established practice across a diverse market?
There’s been a pricing problem in UK personal insurance for several years now. It started out with discounts for new customers being funded by increase prices for existing customers – so called dual pricing. That has since evolved into something much more sophisticated. Insurers have invested huge resources into price optimisation, whereby prices are set according to how much the consumer might be willing to pay. After all, the logic goes, why offer people an introductory discount when they would have given us their business on normal rates (more here and here)
So the publication by the two trade bodies for insurers and brokers of a set of guiding principles and action points should be good news. And it is, to an extent. Yes – it is recognition that there is a problem that needs fixing. And yes, given their roles as trade bodies, the ABI and BIBA were only ever going to present principles that reflected the minimum their members would jointly commit to. Yet for all their well manicured narrative , these pricing principles are a disappointment.
The pricing principles signal a commitment to do better, but give little substance as to how much that better will be, what it will look like or how it will be achieved. And the pricing problem that needs fixing is portrayed more as down to customer inertia than to insurer and broker behaviour. It’s almost as if the sector is saying ‘it is not our fault; they made us do it.’ That lack of reflective honesty could point to a culture that would prefer to resist change.
So while they engage as a nice piece of public relations, these pricing principles are not where attention should be focused. The spotlight must remain on the insurers and brokers who make the real, tangible pricing decisions. Those firms now have to respond, on the one hand, to the commitments made on their behalf by their trade body, and on the other hand, to the expectations of a regulator who has made clear that each firm’s pricing strategy needs to be based around a clear set of principles.
The worst thing those insurers and brokers could do would be to rehash the ABI/BIBA pricing principles into a localised version. That would be a mistake because the ABI/BIBA principles are amorphous and unclear; more like statements of broad intent. So where should insurers and brokers look for the template upon which they can start working out their own principles?
The FCA is looking for principles that link, in a specific pricing way, with their Principles for Businesses. Those principles talk about acting with integrity, about fair treatment of consumers and about addressing conflicts of interest. So an insurer should have a principle relating to the fairness of its pricing that resonates with key audiences like investors, regulators and business partners.
And of course, insurers also need to show how their pricing principles are being implemented. Take the current position in the UK household market. A customer who stays with their existing insurer for 5 years will, on average , pay 70% more than a new customer (more here). That’s a colossal difference. Clearly, a pricing principle that addresses fairness needs to address that scale of premium differential. Yet by how much? What does a ‘marked improvement’ mean?
And will be the impact for that insurer, on rates, on competitiveness, on profitability? Confidence in the sector (think investors, regulators and consumers) will be threatened if an unravelling of price optimisation doesn't go well. One scenario that is more than a little possible would involve an initially subdued response by insurers to these pricing problems, followed by a more significant response being forced on the sector by a regulator. The more the sector treats these pricing problems as a public relations exercise, the more likely that scenario becomes.
These pricing principles have emerged because the sector read the regulator's warning signs that they needed to get their pricing strategies in order. Yet will these principles be enough for the sector to gain the initiative? I doubt it – it feels too little, too late. Before insurers can offer something substantive, the regulator will take control of this pricing debate. They will present evidence of the detriment that price optimisation can cause and draw a line from it straight to an individual on the SMCR responsibility map.
Consider for a minute events in the US insurance market. There, in over 20 states, price optimisation has been labelled as unfairly discriminatory and banned where based upon any of the following mechanisms:
What this tells us is that some quite significant regulators are prepared to tackle pricing practices head on. Will the FCA be prepared to do the same? Time will tell, but what I am sure of is that they have been assembling an evidence base that gives them that option, should they wish to do so.
So where should an insurer or broker start when preparing to draw up its own pricing principles? Here are a few suggestions to start with…
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.