The Ethnicity Penalty : What the BBC Research Points To

Details of the BBC Verify investigation can be find here. The news item that went live on the BBC News website on Monday opened with this stark finding:

“Car insurance quotes were a third more expensive in some areas of England with the biggest minority ethnicity populations”.

So what’s going on? Having produced two sets of research into the ethnicity penalty, Citizens Advice would have realised that their campaign would achieve greater traction if others were to conduct similar research and publish their results.

The fact that the BBC Verify team took up this topic and, against what I’m sure is a pretty demanding workload, invested time and money in exploring motor insurance pricing says something about the scale of the problem that is growing for both the sector and the regulator.

Classic Tactic

This is in many ways a classic tactic. To avoid the impression that this is ‘just a Citizens Advice’ thing, someone else carries out an independent investigation and finds pretty much the same thing. It’s at the heart of ‘the scientific method’ – your findings are deemed objective and verified if someone else can independently reproduce the same findings.

One group of people who will be reading the news report by BBC Verify and jumping up and down in consternation will be Parliamentarians on the Treasury Committee. Five years ago, they chastised the regulator for relying on the word of insurers that they didn’t discriminate in their pricing. Instead, the FCA was told to demand the relevant data and analysis from insurers and verify it for themselves.

Yet this was the FCA’s reported response to this week’s BBC Verify news item…

“We recently asked the largest motor insurers to show us how they ensure their pricing models do not discriminate based on ethnicity, and we are reviewing their responses.”

That doesn’t bode well for the regulator. If one of Parliament’s leading committees urges you to do something, it’s not wise to take four to five years to get round to it.

Hard Grilling Ahead

In their defence, the FCA will point to their work on the Consumer Duty, as it is through that regulatory initiative that they’ve said they’ll address discriminatory pricing. Yet as I’ve said before, it is too slow a process. Consumer groups are not going to wait for an initiative that is likely to only produce tangible results five or more years down the line.

Discriminatory pricing is of course a complex issue, but it looks very much like the regulator has not grasped the issue firmly enough. Remember that Citizens Advice’s recommendations in its ethnicity penalty reports were aimed just as much at the regulator as at insurers. And the BBC Verify news report does pretty much the same.

What we shall soon see then is the FCA facing some pretty hard grilling from the Treasury Committee. The last time discriminatory pricing was looked at by the Committee, the then interim CEO of the FCA said that they had the resources and expertise to get inside their models. It was a bullish promise that has not been delivered upon. I doubt if next time round, the regulator will be quite so punchy in its reassurances.

A Public Policy Debate

Following the Treasury Committee’s report in 2019, and Citizens Advice reports in 2022 and 2023, I would have thought that every UK motor insurer would have assembled evidence to show that their pricing was not in breach of the Equalities Act. If any of them haven’t, then they’ll now be running a enterprise risk of significant proportions.

Assuming instead that they have all assembled their evidence, it appears that they’ve so far been channelling their findings through their trade body. This is what the ABI had to say in the BBC Verify news report:

"Insurers do not and cannot use ethnicity as a factor when setting prices and our members comply with the Equality Act 2010. However, we recognise that these and other similar findings raise an important public policy debate."

Let’s break this down. Firstly, they say that “insurers do not …use ethnicity as a factor when setting prices…” In many ways, they’re bound to say that, and I think they’re about 99% correct. The problem is that I’ve been told by two highly reputable and independent sources that at least one insurer does use ethnicity in a way that can influence price. Note the difference between ‘setting’ and ‘influence’. The end result to the consumer is the same though.

And if one turns around that 99% figure, I believe it is true that the absolutely vast number of insurers do not using ethnicity as a factor when setting prices.

Pulling in Supporters

There is a big difference though between ‘not using ethnicity as a factor when setting prices’ and ethnicity coming out as a differentiating characteristic in pricing outcomes.

And it is in that difference that the implications of the ABI’s statement that “these and other similar findings raise an important public policy debate” stand out. Reading behind the public relations words, I suspect that something along the following lines has emerged:

• The ABI could have found that ethnicity has been influencing some pricing outcomes;
• The extent of that influence could have been judged (probably by their lawyers) to not have been such that the Equalities Act could be described as being breached;
• This could explain the ABI’s call for a public policy debate, in order to arrive at an acceptable degree of ethnicity variance in pricing, in relation to the overall effort across all business sectors to manage the impact of bias data and bias algorithms.

The ABI’s strategy therefore appears to be to keep Citizens Advice at a distance and instead put what they see as the reality of insurers’ situation to a set of government ears like the Centre for Innovation and Data Ethics. Both sides then are drawing together their supporters, presumably in preparation for when the wheels of government start to really engage with this situation and things come to a head.

When might that be? I expect it to happen this year.

The Regulatory Response

In the meantime, the FCA will be working on the evidence that the UK’s largest motor insurers will have provided to them to show “…how they ensure that their pricing models do not discriminate based on ethnicity”.

Again, there are messages beneath these public relations words. The FCA has asked not for data to establish if discrimination is happening, but how those insurers ‘ensure’ that there’s no discrimination. That reads to me very much like a call for governance and compliance information, not hard data itself.

Governance information tells you about processes, not about outcomes. The difference lies in how thoroughly those governance arrangements are being applied, and whether they are actually having the impact that was intended. As the FCA itself knows from previous investigations, the gross net gap between intention and efficacy on the one hand, and outcomes on the other, can be a wide one.

My hope is that insurers will also provide data evidence to show that their gross net gap is within acceptable limits. In other words, provide the FCA with their own internal reporting on discriminating pricing, which, as I said at the outset, they should have been generating after the Treasury Committees’ 2019 call on the FCA to pull in evidence.

The End of the Beginning

The war of carefully crafted words around discriminatory pricing in motor insurance has moved up a notch. Supporters are being assembled. Something is building and individual insurers need to decide: do they sit behind the ABI and follow their line, or prepare something specific to their own situation?

Most if not all will do the former, after having weighed up the latter. The culture in personal lines underwriting is to compete hard, but stand together on principle. The hope is that Government will enter the debate and suggest what would in effect be ‘an acceptable level of temporary discrimination while data analytics is improved’.

This will mean the ethnicity penalty being positioned as little more than a ‘technical systems fix’.  Would consumer groups be prepared to run with this? Only at the price to the sector of having Citizens Advice appointed as its statutory consumer advocate. This would allow them to pull data from insurers and check whether those ‘systems fixes’ are actually achieving the necessary outcomes.

What we have here then is the end of the beginning, not the beginning of the end.