The Fairness of Insurance Pricing is Challenged Again

Martin Lewis has a big reputation in political circles, and money and mental health are issues of great importance to him. He founded a charity some years ago called the Money and Mental Health Policy Institute (the Institute), and they have recently issued a research paper on the difficulties people with mental health issues have securing travel insurance, at a fair price or even at all.

Here are the report’s three commendations…

"The Financial Conduct Authority (FCA) should launch an investigation to examine the data and models firms use in pricing decisions to guarantee they comply with regulations and laws. This must be accompanied by clear expectations for insurance firms to deliver fair value for customers with mental health problems, which is a key element of Consumer Duty.

The insurance industry should use accurate data and provide greater transparency, so customers know what information is used and how to challenge decisions. This will also involve increased accessibility throughout the customer journey, making it easier to understand policies, make claims and help those struggling with payments.

The government should ensure the FCA has the resources to launch the industry-wide investigation, and explore the potential for a social policy intervention to ensure people with mental health problems can access insurance in key markets."

The Exemptions

Their case then is focussed on the extent to which insurers are abiding by the terms of their exemptions to the UK Equalities Act. That Act gives insurers an exemption to discriminate against people on the basis of a disability, so long as how they do this is based upon actuarial data or other data that it is reasonable to reply upon, and that the discrimination is a reasonable thing to do.

What the Institute is questioning is the extent to which the data insurers are using to make these decisions is accurate, up-to-date and relevant. The challenge they have issued is for insurers to demonstrate that they are meeting those exemption terms. So this is about fairness being evidenced through greater transparency.

An example quoted in the trade press summed up the problem. If someone declares that they took anti-depressants a few years ago, then their quote for travel insurance will be higher as a result, even though they were managing their condition, had sought treatment and did not require any form of admission. The Post Magazine’s editor described the report as a source of shame (paywall).

What One in Four Means

This is far from being new news. I wrote this article five years ago. In it, I referred to the widely accepted (including by Government) view that one in four people will experience some form of mental illness in their lifetimes. That number matters, for it means that we will all very likely have someone in our family or near family who will experience an mental illness issue. It may even be ourselves.

This means that the market’s approach to the underwriting of mental illness can no longer be seen as something done to an abstract notion of a customer, but instead to someone (perhaps several people) that the underwriter knows and loves. How will their lives be affected by limited to no access to travel insurance – no family holidays for example. Or to life insurance – the family becomes the insurer of last resort, for a long time.

Time and Fairness

This may be seen by some in insurance as only fair – why should lower risks subsidise higher risks? Yet it is a viewpoint that ignores the other aspect of fairness – the fairness of need, of access and of time. The problem for insurers is that the public and their politicians tend not to ignore those other aspects of fairness, which is why Martin Lewis’s case will resonate with policy makers.

An important angle here is time. Time as a dimension of fairness in insurance matters because that figure of ‘one in four people’s lifetime’ means that insurers feel driven to try and predict as much as possible who could at some point have (but doesn’t yet present) a mental health condition. This is why insurers are funding research like this, to use social media images as predictors of mental health issues.

At the same time, travel insurance is a short term policy with catastrophe cover at its core. That combination gives prediction more value.

Signposting

One response to this research that insurers will seek to put weigh on is the signposting arrangement put in place a few years ago. These mean that someone having difficultly finding insurance for something like travel insurance will be signposted to another insurer who might be better placed to help.

In short, the market passes you on in the hope that someone else will deal with you. It’s a sticking plaster approach that hopes to solve the immediate problem, but masks the deeper problem around how insurers are using data to differentate between ever granular levels of risk.

The FCA have said in response to the institute’s research that they expected insurers to abide by the law, and that the sector’s signposting arrangements are due to be reviewed this year. It sounds nice, but it’s pretty boiler plate language, lacks substance and avoids transparency and commitment.

Too Many Questions?

In response to the research, Aviva have admitted that they may have been asked too many questions when it came to mental health issues. They’ve acknowledged that it wasn’t right that “computers were making the decision on who’s covered and who’s not” and acknowledged customers could be better supported with a human interaction. Again, it sounds nice, but is far from convincing, given the extent to which the decisions that those humans can make are often framed by decision systems.

The problem lies less in whether it is a human or machine making the decision, and more in the decision parameters within which each case is judged. It is therefore a specification issue that insurers need to address, not a systems issue.

Data Doesn’t Come From Questions

Insurers nowadays are becoming increasingly confident to reduce the questions they ask of prospects, because they’re increasingly drawing the data they need from secondary sources, such as social media, shopping and travel data. That human in the loop will be using that secondary data to reach their decision, much more so now than how a prospect answers some questions. Indeed, insurers are said to now trust that secondary data more than the primary data coming in through prospects’ own answers to questions (more here)

Let’s now bring in the application fraud risk. The Institute’s research makes direct mention of people with mental health issues becoming reluctant “to disclose to their provider for fear of unaffordable premiums or declines.” In other words, they don’t think insurers use their data fairly.

And the sector is alert to this. One insurance director at the research’s launch event had this to say…

“…more needs to be done to address the level of non-disclosure because of customer perceptions of insurers, and how they would be left paying for something they cannot use.”

The Fraud Angle

It was an interesting point. The thrust of his point was that charities need to tackle that non-disclosure just as much as insurers need to tackle the data they use in decisions.

Reading in between the lines, he is inferring that they needed to do this in order for people with mental health issues not being scored as suspected fraudsters at the application stage. Given that most fraud now is ‘suspected application fraud’, this was not an idle comment, but a firm rejoinder that the problem is multi-faceted and in need of wider ownership.

I have two views on this. Firstly, hints of non-disclosure of mental health issues are very likely to result in that proposer being labelled as fraudulent, and that then cascading through other insurers’ systems via the Insurance Fraud Bureau’s services. And secondly, his comments seem unusually stark, not much short of blaming the problem on consumers.

The message was that consumers needed to trust insurers more, and it was made at a launch event for a piece of research about why some consumers find it very difficult to trust insurers. Is this typical of sector sentiment on the issue of mental health issues? Are they saying ‘it is not about us, it is about you’.

A Classic Dilemma

One could frame this question another way. It is in effect a pretty fundamental ethical dilemma. Do you put honesty first, or do you put fairness first? How does a senior insurance executive make that decision? And when did they last have any training in how to do so? (more here)

It can also be presented in a more legal way. The insurer may be playing around with the conditions attached to the sector’s exemptions to equalities legislation, but hey, these prospects are committing fraud. I’m not a legal expert, but I would think there is precedent for resolving this type of legal dilemma. The problem for insurers is that their fraud judgements are all too often based around their own parameters (harder than legal ones) and judgements (as in suspected of fraud). And all this is done with almost complete opaqueness. That’s why I have said before that the sector’s approach to counter fraud too often seems like a house of cards – much weaker than they think it is and at risk from catastrophic collapse.

Will the Challenge Succeed?

The Institute and Martin Lewis’s challenge to the FCA may come to nothing for two reasons. Firstly, the FCA will see this as a social issue and so outside of their remit. Discrimination belongs to the EHRC, goes their narrative. And secondly, it could equally come to nothing because the FCA lacks the remit to investigate the decision making systems of the Insurance Fraud Bureau, because it falls outside their regulatory boundary.

In large part, the Institute’s third recommendation anticipates this. They say later in the report…

“Enforcing the Equality Act is not in the remit of the FCA but rather the Equality and Human Rights Commission (EHRC). That said, our recent research highlighted the limited extent to which the Act is followed and enforced in financial services. The requirements in the Equality Act are so linked to the outcomes the FCA is concerned with through the Consumer Duty that this needs to be part of their approach. The FCA has previously said that any breach of the Equality Act would likely constitute a breach of the Consumer Duty.”

What I think they’ve missed in that last sentence is that the FCA really does want someone else (such as the EHRC) to decide on that breach of the Equality Act. They don’t want to do social issues. The FCA just want to take someone else’s decision on the Equality Act and convert it into a decision on a breach of the Consumer Duty.

The problem is that the EHRC doesn’t have the resource to get inside the type of complex decision systems used by insurers. So we appear to have the ridiculous situation whereby the FCA have boasted at Westminster of having the resources for this, but see it as outside of their remit, while the EHRC have the remit but not the resources. It sounds like a game of regulatory tennis! Sure, they signed a memorandum of understanding a few years ago, but such agreements rely on the will to take up an issue, which I don’t think the FCA has.

Some people may feel that this situation gives insurers the space to get on with business as usual in relation to people with mental health issues. That in my mind would be a significant misjudgement. Remember this article from last year, about algorithmic destruction. Doing business as usual on issues like this tends to move regulators towards considering it, particularly those less close to the sector on day-to-day terms (which the FCA suffers from).

Looking Forward

If the Institute’s challenge doesn’t push the FCA into the action they’re seeking, then what? Their Plan B is signalled in their third recommendation…

"The government should…explore the potential for a social policy intervention to ensure people with mental health problems can access insurance in key markets."

In other words, they will go down the political intervention route, leveraging Martin Lewis’s considerable skills and influence to drive home their case.

The FCA will turn for their response to the Consumer Duty. So one key question for the Institute is whether they’re willing to wait for that Duty to have the impact that expectations have built up for it. I’m not convinced the Institute will, for they will fear having their concerns put into the ‘wait and see’ lane for circa three years. They will want to see something tangible happening in the meantime.

I’m not convinced though that the FCA will be able to deliver much in the meantime. What this means is that the sector really does have to prepare for the introduction of a consumer advocate and a new era of greater transparency and challenge that will go with that.