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.  

Opinion

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.  

Articles  

Ethical Risks and Insurance Pricing 

In 2017, I outlined 7 risks relating to insurance pricing, that underwriters needed to have on their ethical radar. Three of them have since been realised, and two others are expected to attract regulatory attention this year. 

I have no magic ball, rather a radar that picks up on a wide variety of sources. What distinguished my approach is that variety of sources, a critical but pragmatic mind, and an ability to see how these different signals connect together.  Read the article here...

The Ethics of Insurance Pricing: Seven risks underwriters need to have on their radar.

And one more that is recent: Data about Convictions 

Insight  

Privacy and Pricing

How much data does an insurer need to collect about its customers in order to price its products? It's a question that sits in the middle of a developing storm. Research by both trade bodies and academics highlight just how sensitive the public are to how insurers approach this.

This article from October 2019 highlighted the issues...

Are Privacy Concerns about to Undermine Pricing Strategies?

And this research from 2020 and 2021 then confirmed this as an issue that deserved attention...

Consumer Attitudes to Data and Insurance (UK)

American Views on the use of Personal Data in the Pricing of Auto Insurance

What this all means is that insurers should not treat privacy as just data protection compliance. How insurers acquire and use data for pricing gets to the heart of the relationship that insurers want with their clients. To build trust, they should work from the relationship and go on to build their data and pricing strategies around it.

Insight 

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…

The Final Pricing Report is about so much more than Loyalty Penalties

Insight 

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...

Pricing is a Prudential Risk that comes with Complications

Consultancy

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.

Challenge 

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? 

Smart Contacts in Insurance - Clever but Dangerous

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