The biggest event in 2019 relating to ethics and insurance will be the announcement by the UK regulator that firms must be able to demonstrate clear principles for insurance pricing. That’s my prediction, based upon events and discussions I’ve seen unfold over the past twelve months.
Let’s stop for a minute and just think that through. This means (if I’m right of course) that insurance firms will have to show not only that they have principles that are relevant and clear, but also that they are using them to guide their pricing strategies and decisions. Firms will need to show how they’re ‘walking the talk’.
So how has this come about? The recent words of Mary Starks, the FCA’s Director of Competition and Chief Economist, are clear. She talked about the FCA overseeing pricing practices on two levels. The first level is this: “do we understand the principles on which firms are pricing, and are we OK with those principles?”. And the second level involves “…keeping enough of an eye on the data so that something that starts out as an acceptable principle doesn’t get taken too far”. She went on…
“There’s quite an interesting debate around the principles that firms are using when it comes to big data and artificial intelligence and machine learning and so on, because the firms don’t necessarily know what principles their algorithms are using – it’s just throwing computing power at patterns and finding stuff, and so there’s some quite interesting AI ethics questions around how do we ensure that firms have enough control over their algorithms to make sure for example that they’re not racist, or colluding illegally, or doing any of the things that we would object to a person doing”.
Two points worth noting. Firstly, the FCA see this as a matter of market confidence. They’re worried that pricing is becoming so complex and opaque that ‘iniquitous outcomes’ are happening that will undermine public confidence in the market. And perhaps more importantly to the FCA, the confidence of Parliamentary committees in the market.
And secondly, that reference to “…keeping enough of an eye on the data…”. The FCA’s data scientists have been equipping supervisors with the tools to pro-actively monitor pricing behaviours.
This won’t be the first time that a regulator has told firms in the insurance market to adopt principles like this. In 2017, the UK’s Competition and Market’s Authority (CMA) told price comparison websites (PCWs) to follow the new CARE principles. It felt back then just a matter of time before something similar would happen across the insurance market.
The CMA’s approach was an interesting one. They made clear that the CARE principles did not introduce any new obligations, and nor did they reflect all existing obligations. Instead, the principles give PCWs a common base upon which to self assess those key obligations. The carrot for doing so was an suggestion by the CMA that they would be “…less likely to prioritise enforcement against them.” Might the FCA adopt that carrot approach too?
The point at which principles for insurance pricing will move onto the consultation agenda is going to be the current review of pricing practices in household insurance. That review will never result in any form of pricing regulation – the recent demise of Wonga guarantees that. Instead, their favoured remedy will be a form of self regulation - pricing principles – with increasingly automated oversight through supervisory technologies.
Now principles for insurance pricing may seem like a lot of work. Yet are they? If, like the CMA’s CARE principles, firms are only being asked to evidence how they’re meeting a number of existing obligations, then one might argue that firms could just draw what they need for these principles from their existing panoply of compliance measures. And some firms will try this, but they do need to take care, for reasons I explain in a guide I’ve put together and which you can download for free by clicking on its cover image below.
In that guide, I also highlight four ways in which firms can themselves benefit from having these principles. I’ll highlight one of those ways here. Say your business includes some SME or personal lines schemes, perhaps for a well known corporate or charity brand. Such clients will want to know that the reputational value they’ve built up in their brand is not going to be decimated by some ‘iniquitous’ pricing in their insurance scheme. What better way to reassure them than by sharing your firm’s pricing principles and demonstrating how they are upheld.
You can download my guide to principles for insurance pricing by clicking on the image opposite. It covers twenty questions that pricing people will want answers for, and addresses them clearly and succinctly.
2019 is going to be a eventful year for insurance pricing. Preparing your response to the challenges it could present and reflecting this in your planning will make a big difference. Any questions – drop me an email.
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.