The Ethics of Insurance Pricing
The last two years have seen insurance pricing scrutinised like never before. Yet this is only the beginning. While the scrutiny has been around fairness, and has come from the conduct regulator, the next two years will see pricing practices examined on a number of other ethical issues, and by a wider range of stakeholders.
Your scope for assessing the ethics of insurance pricing has to be set with care. These are the ethical issues that you should include…
- Fairness ; Discrimination ; Conflicts of Interest ; Privacy and ; Transparency.
And concerns about these issues will come from a variety of sources…
- other regulators, such as competition, prudential risk and data protection;
- investors, who will want to see these risks being managed and controlled;
- civil Society, as we saw in the UK with the super-complaint.
The transformation of insurance pricing has taken the sector into new and exciting territory. Yet it is also true that some of the ethical implications of that new territory are sensed but uncharted. This means that, like many explorers of old, underwriters must contend with great opportunities and considerable risks. And the greatest risks of all come from the ethical issues that are being raised about current pricing practices.
Why are some of those ethical risks so great? It is because their significance, if realised, would be immense. And most worryingly, their likelihood may not be as negligible as the sector sometimes thinks.
Signals sent out by some investors, and by prudential regulators, are now setting expectations. The ethics of insurance pricing is capable of being disruptive and dangerous to the financial well-being of some insurance firms. Chief risk officers are now expected to have incorporated the different dimensions to that ethical risk into their risk management processes. This then allows the insurer’s board to be informed, and in turn make informed decisions.Those decisions will be monitored, primarily through supervisory technologies. Coupled with accountability frameworks like the UK’s SMCR, this puts insurance executives in the spotlight on pricing practices like never before. That is why the ethics of insurance pricing is at a beginning, of a new phase of decision making and accountability.
Quote | Jose Ossandon, 2015
Writing about insurance, Ossandon saw 'price' as...
not simply a matter of supply and demand, but rather the product of a wider range of actors, including regulators, lawyers, policymakers, members of parliament, consumer associations and representatives of the industry.
This means that every pricing strategy needs to factor in that ecosphere of attention and the issues driving it. After all, that is how the super-complaint came about.
More than just Pricing
Recent pricing events in the UK insurance market have a significance much wider than simply how retail policies are priced. They emphasise the importance of accountability and the steps being taken by the regulator to enforce responsibilities. This is happening both upstream and downstream, and its implications are examined here…
Pricing is now a Prudential Risk
For a long while, underwriters didn't even associate pricing with conduct risk. The 2020 pricing review changed that. Yet in late 2019, a UK regulator firmly labelled pricing as a prudential risk as well.
That shouldn’t come as any surprise though. After all, if an insurer's pricing philosophy, strategy and systems are under close scrutiny, then its financial health will be monitored as well. Here's my article on this from 2019...
A Critical Friend
The role insurers most often ask me to perform around ethics and pricing is being a critical friend. I review their approach to pricing from an independent and informed perspective. The reason they often give for using me in this way is that I am seeing risks in ways that others tend not to, and I am backing this up with analysis founded upon academic research. My approach is pragmatic, but also challenging when needed.
Get in touch if you'd like to have an informal chat.
Smart Contracts - clever but dangerous
The use of smart contracts in insurance opens up all sorts of opportunities. And they sound clever and exciting, but they also raise ethical questions. How might they influence the trust that consumers have in insurance?
Data Ethics in Insurance Underwriting
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