Review Of Differential Pricing In The Private Car And Home Insurance .

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Review of DifferentialPricing in the Private Carand Home Insurance MarketsFinal Report and Public ConsultationJuly 2021

Differential Pricing ReviewTable of Contents1.Executive Summary .32.Summary of Proposals .83.Introduction . 114.Methodology.165.Findings from the Review and Proposals. 195.1 Pricing Practices .195.2 Oversight of Pricing Practices .295.3 Automatic Renewals.335.4 Complaints Resolution .385.5 Vulnerable Consumers .395.6 Engagement and Transparency.416.Public Consultation Process. 437.Next Steps .57Appendix 1 - Glossary of Key Terms. 58Central Bank of IrelandPage 2

Differential Pricing ReviewCentral Bank of IrelandPage 31. Executive SummaryInsurance serves a critical role in reducing uncertainty by protecting peopleand businesses against the risks of future events. Consumers rely oninsurance to provide support in the event of loss or serious accident, to planfor retirement, to enable them to confidently invest in and run theirbusinesses and more. A financial services system that sustainably servesthe needs of the economy and consumers therefore needs functioning andtrustworthy insurance markets and insurance providers. 1As with the financial services system as a whole, innovation in theinsurance industry brings with it the possibility of improved products andofferings for consumers. However, the advances in computing power, dataanalytics and modelling techniques also increase the risk that pricingpractices could result in unfair outcomes for some consumers.The Central Bank of Ireland’s (the Central Bank) role is to deliver effectiveand purposeful supervision that protects the interests of consumers andsupports a robust insurance sector. Financial services providers areresponsible for providing products that meet their customers’ needs bothnow and into the future, and doing so fairly. The Central Bank will intervenewhere we have reason to believe that unfair practices are occurring whichtake advantage of consumer behaviours and habits. We launched ourReview of Differential Pricing in the Private Car and Home InsuranceMarkets (the Review) for this reason.Differential Pricing ExplainedDifferential pricing is where customers with a similar risk and cost ofservice are charged different premiums for reasons other than risk and costof service. It includes a range of techniques that combine information aboutexpected claims experience and customer behaviour - for example, thetendency to renew or shop around.The practice of differential pricing is widely used across a range of markets,and can bring benefits for consumers. For example, it can encouragecompetition and innovation and facilitate market access for consumers whomight be unable or unwilling to pay a uniform price. However, differentialpricing can also cause harm to consumers, particularly if it is used toincrease the prices of policyholders by stealth, or if it affects vulnerablegroups or those with differing abilities, time or willingness to search forbetter offers.1For the purpose of this report, ‘insurance provider’ includes non-life insuranceundertakings and insurance intermediaries including Managing General Agents.A financialservices systemthat sustainablyserves the needsof the economyand consumerstherefore needsfunctioning andtrustworthyinsurance marketsand insuranceproviders.Differentialpricing is wherecustomers with asimilar risk andcost of service arecharged differentpremiums forreasons other thanrisk and cost ofservice.

Differential Pricing ReviewEvidence and FindingsWe undertook the Review to assess how differential pricing is used in theprivate car and home insurance markets in Ireland and its impact onconsumers. We focussed specifically on these markets because of theirimportance to consumers and to society more generally. Moreover, theseproducts lend themselves to the application of differential pricingtechniques because of the large volumes of customers, significantpremiums and the levels of customer inertia associated with them.Our Review focussed on the most significant forms of stealth pricingpractices applied by insurance providers in the market. These include pricewalking, where customers are charged higher premiums relative to theexpected costs the longer they remain with an insurance provider, and theclosely related practice of treating the pricing of new business and renewalcustomers differently for reasons other than risk and cost of service, whichis known as dual pricing.We examined the extent to which the use of these pricing practices lead tooutcomes consistent with the Consumer Protection Code 2012 (the Code).We also sought to identify the drivers of consumer behaviours, includinghow consumers engage with the insurance industry, and assessed theadequacy of the governance and oversight of differential pricing asexercised by insurance providers.The Review incorporated a market analysis of the 11 insurance providers inscope, including 44 inspections, quantitative analysis of almost 11 millionindividual policy records and the gathering of consumer insights based on asurvey of circa 5,500 consumers. 2 Following our market analysis work, weissued a Dear CEO letter to the insurance sector in September 2020 settingout our initial observations and requirements. This was followed by anInterim Report in December 2020 which concluded that the majority offirms apply some form of differential pricing.The Review is now complete. Our analysis shows that some of the practicesidentified could result in unfair outcomes for some consumers in theprivate car and home insurance markets. As a consequence of thesepractices, the premiums paid by certain policyholders deviate significantlyfrom the expected costs of the policy to the insurer. 3 The price relative tothe expected costs also increases the longer a customer remains with theirinsurer. We also found that oversight of pricing practices is lacking and thatthe automatic renewal processes, which is a common feature of theinsurance market, lacks transparency. Accordingly, we are proposing a23For the purpose of this report, the 11 insurance providers in scope of the Review arereferred to as ‘firms’.For the purpose of this report, non-life insurance undertakings are referred to as‘insurers’.Central Bank of IrelandPage 4

Differential Pricing Reviewseries of reforms to strengthen the consumer protection framework, whileensuring that consumers retain the opportunity to avail of premiumdiscounts.Our first core proposal is to ban price walking in the motor and homeinsurance markets for personal consumers.The practice of price walking is unfair and could result in unfair outcomesfor some groups of consumers in the private car and home insurancemarkets.Our analysis showed that long-term customers (those who stayed with thesame insurer for nine years or more) pay, on average, 14% more on privatecar insurance and 32% more on home insurance than the equivalentcustomer renewing for the first time.On this basis, we propose to ban price walking by insurance providers. Thismeans that at the point of renewal, insurance providers cannot chargepersonal consumers who are on their second or subsequent renewal apremium higher than they would have charged them if they were a year onerenewal consumer at that point in time.This approach would allow insurance providers to continue to providediscounts for new business customers and ensure that personal consumersretain the opportunity to get a better-priced premium through switchinginsurance provider while removing the loyalty penalty for those consumerswho do not switch insurance provider regularly.Our second core proposal is to require providers of motor and homeinsurance to personal consumers to review their pricing policies andprocesses annually.This would ensure that insurance providers maintain focus on their pricingpractices and the impact of such practices on their customers, while alsoensuring adherence to new pricing provisions and the fair treatment ofconsumers.Our third core proposal is to introduce new consumer consent anddisclosure requirements to ensure the automatic renewal process ismore transparent for all personal non-life insurance products.Automatic renewal is the practice where an insurance contract allows fora policy to be automatically renewed, unless the customer tells theinsurance provider otherwise before the renewal date. This proposalwould ensure that consumer consent was required for the renewal of theirCentral Bank of IrelandPage 5Three coreproposals:Ban pricewalking in themotor andhome insurancemarkets forpersonalconsumers.Requireproviders ofmotor andhome insuranceto personalconsumers toreview theirpricing policiesand processesannually.Introduce newconsumerconsent anddisclosurerequirementsto ensure theautomaticrenewalprocess is moretransparent forall personalnon-lifeinsuranceproducts.

Differential Pricing ReviewCentral Bank of IrelandPage 6insurance contract on an automatic basis and allow personal consumers tomake more informed decisions.Along with these specific policy measures, we are also considering anumber of additional measures in relation to complaints resolution,vulnerable consumers and customer engagement and transparency. Thesewill inform the separate review of the Code (the Code Review) that iscurrently under way and will be published in the coming months. 4The Review also considered the likely costs and benefits of potentialsolutions to the risks identified, conducting analysis of potential market andconsumer price effect. Our recommendations and proposals for change arefocussed on the issues that have the potential to cause the greatest harmfor consumers and are based on the evidence gathered as part of theReview.The series of proposed policy measures would, in our view, strengthen theconsumer protection framework and ban practices that directly lead tosome consumers paying more for private car and home insurance policiesbased on how long they are with their current insurance provider.Next StepsThis report incorporates a public consultation on our proposals to addressrisks to consumers arising from price walking, oversight of pricingpractices, and automatic renewals (as set out in the Public ConsultationProcess section of this report, Section 6). The consultation seeks viewsfrom all relevant stakeholders on the proposed policy measures. Theconsultation sets out the proposed provisions and a series of questions,seeking views on the specific issues identified. We welcome evidence tosupport views provided in response to this consultation.The public consultation process will run until 22 October 2021. Anysubmissions received after this date may not be considered. Please submitany submissions by e-mail to consumerprotectionpolicy@centralbank.ie.Taking into account the views of stakeholders in response to thisconsultation, we intend to finalise these measures early next year and thatthey will apply to insurance providers from 1 July 2022.4A consultation in relation to the Code Review is expected to be launched in Quarter 4,2021.This reportincorporates apublicconsultation onour proposals toaddress risks toconsumers arisingfrom pricewalking, oversightof pricingpractices, andautomaticrenewals.The publicconsultationprocess will rununtil 22 October2021.

Differential Pricing ReviewAs set out above, our proposals in relation to complaints resolution,vulnerable consumers and customer engagement and transparency asappropriate will be consulted on separately as part of the Code Review.We will also complete supplementary analysis to better understandcustomer engagement in the private car and home insurance markets andexplore how customer engagement might be improved, including by wayof enhanced transparency measures and the application of insights frombehavioural science.Central Bank of IrelandPage 7

Differential Pricing ReviewCentral Bank of IrelandPage 82. Summary of ProposalsThe proposals for change are focussed on the issuesthat have the potential to cause the greatest harmfor consumers and are based on the evidencegathered as part of the Review.We propose to strengthen the consumer protection framework throughamendments to the Code. Our core proposals concern the areas of pricewalking, oversight of pricing practices, and automatic renewals, whilefurther work will be undertaken in the areas of complaints resolution,vulnerable consumers and customer engagement and transparency. Theproposed provisions are set out in the Public Consultation Process sectionof this report and can be summarised as follows:Price WalkingWe propose to add a number of new provisions to the Code in respect ofmotor and home insurance pricing for personal consumers in order toaddress the worst effects of price walking.These proposals require: A ban on price walking by insurance providers meaning they cannotcharge personal consumers who are on their second or subsequentrenewal a premium higher than they would have charged them ifthey were a year one renewal consumer at that point in time. Where new customers are offered a lower price to attract theirbusiness, it should be clearly disclosed to them that this representsa new business discount. 5Oversight of Pricing PracticesWe propose to add a number of new provisions to the Code requiringoversight and review of motor and home pricing practices for personalconsumers, including the requirement to assess adherence with theproposed new pricing provisions.These proposed new provisions require: Insurance providers to carry out an annual review of their motorand home pricing policies, processes and models and:o Rectify any deficiencies identified; ando Retain a written record of the review and actions taken torectify any deficiencies found.5This provision will be developed further and form part of the consultation on the CodeReview later this year.Our coreproposalsconcern theareas of pricewalking,oversight ofpricingpractices, andautomaticrenewals.Further workwill beundertaken inthe areas ofcomplaintsresolution,vulnerableconsumersand customerengagementandtransparency.

Differential Pricing ReviewAutomatic RenewalsWe propose to add a number of new provisions to the Code in respect ofautomatic renewals in the non-life insurance market, in order to providegreater transparency around this practice and allow consumers make moreinformed decisions based on clear information provided by the insuranceprovider.These proposed new provisions require: Written consent from a personal consumer prior to entry into anautomatic renewal process. A personal consumer to have the right to cancel the automaticrenewal. Notification to be issued to a personal consumer in advance of theautomatic renewal date, requiring certain information to be set outrelating to:o When the policy will automatically renew and how to cancelthe automatic renewal;o Any changes in terms, fees and charges;o Reference to the Competition and Consumer ProtectionCommission’s website relating to switching; ando A statement advising consumers to keep their arrangementsunder review as there may be suitable alternatives in themarket.Complaints ResolutionThe Review raised concerns that firms may not be classifying, categorisingand recording complaints appropriately to effectively analyse and identifytrends, potentially leading to customer pricing issues not being identified,escalated and considered appropriately.To address these concerns, our analysis in relation to complaints resolutionwill be considered as part of the Code Review. This will include proposals toenhance recording and logging of complaints and frequency of conductingcomplaints analysis.Vulnerable ConsumersWhile we did not find evidence that vulnerable consumers are specificallyadversely impacted by differential pricing, firms do not specifically considerpricing outcomes with respect to vulnerable consumers, thus potentiallygiving rise to a risk of poor consumer outcomes and unintendedconsequences for vulnerable consumers. In addition, the level of vulnerableconsumer training varies across firms.In the Code Review currently under way, there will be a dedicated focus onvulnerable consumers and related concerns, including proposals onimproved processes and training.Central Bank of IrelandPage 9

Differential Pricing ReviewEngagement and TransparencyThe Central Bank has made a number of enhancements in respect ofcustomer disclosures in recent years and transparency remains key toensuring consumers have appropriate information to assist them inmaking more informed decisions. It is also important that the informationdisclosed is relevant and balanced in order to avoid information overload,thus ensuring the information provided assists the consumer with theirdecision-making.We believe that the proposed pricing measures would address concernsthat consumers may not be aware that they are being subjected to pricewalking in respect of their annual premiums. The new consentrequirements on automatic renewals would ensure the process is moretransparent for consumers and would allow consumers to make moreinformed decisions, based on clearer information being provided.We will also undertake further analysis to better understand customerengagement in the private car and home insurance markets, exploringhow customer engagement might be improved, including by way of furthertransparency measures and the application of insights from behaviouralscience, and consider any further action required.Central Bank of IrelandPage 10

Differential Pricing ReviewCentral Bank of IrelandPage 113. IntroductionThe practice of charging customers who have asimilar risk and cost of service different premiumsfor reasons other than risk and cost of service isknown as differential pricing. We launched ourReview of differential pricing in the private car andhome insurance markets because of the potentialrisks to consumers arising from this practice.3.1 The Need for a Trustworthy SystemInsurance serves a critical role in reducing uncertainty by protecting peopleand businesses against the risks of future events. Consumers rely oninsurance to provide support in the event of loss or serious accident, to planfor retirement, to enable them to confidently invest in and run theirbusinesses, and more. A financial services system that sustainably servesthe needs of the economy and consumers therefore needs functioning andtrustworthy insurance markets and insurance providers.Financial services providers are responsible for providing financialproducts and services that meet their customers’ needs both now and intothe future, and doing so fairly. They must embed effective cultures buildingon shared values such as professionalism, honesty, integrity, andaccountability, and set standards for themselves and their staff.For a variety of reasons, consumers do not always take the time to shoparound and tend to make assumptions when purchasing financial productsand services. The ability to shop around and negotiate over price can bedifficult for some consumers. Consequently, we expect that all financialservices providers treat their customers fairly.As highlighted in our Financial Stability Note published in November 2020,the practice of differential pricing is widely used across a range of markets,and can bring benefits for consumers. For example, it can encouragecompetition and innovation and it can facilitate market access forconsumers who might be unable or unwilling to pay a uniform price.However, differential pricing can also mean higher costs for someconsumers, particularly those with differing abilities, time or willingness tosearch for better offers.The practice ofcharging customerswho have a similarrisk and cost ofservice differentpremiums forreasons other thanrisk and cost ofservice is known asdifferential pricing.Differential pricingcan be associatedwith benefits andcosts forconsumers.

Differential Pricing ReviewOn this basis, the Central Bank undertook the Review of pricing practicesof private car and home insurance in a number of the largest non-lifeinsurance providers operating in the market to understand the prevalenceand specific impact of differential pricing on consumers, and to determinethe potential for consumer risk and harm arising from these practices. 63.2 The Prevalence of Differential PricingDifferential pricing includes a range of techniques that combineinformation about expected claims experience and customer behaviour for example, the tendency to renew or shop around. Differential pricing isnot unique to the insurance sector; similar techniques are widely usedacross many industries, such as airlines, hotels, telecoms and on-line retailsites. The advances in computing power, data analytics and modellingtechniques within the insurance industry increase the risk that pricingpractices could result in unfair outcomes for some customers.Our Financial Stability Note found that:“From a policy perspective, price differentiation can be associated withbenefits and costs for consumers, which may require a trade-off betweendifferent policy goals (OECD, 2018). For example, it can encouragecustomers to try new products or providers to avail of lower prices, it canpromote new business growth and competition as firms attractcustomers away from existing providers, it can facilitate expandedmarket access for consumers who could not afford to pay a singleundifferentiated price, and it can promote innovation among firms(CMA, 2018). On the other hand, differential pricing can have an uncleareffect on distributional equity (OECD, 2018)”. 7Consumers may not always be aware that differential pricing is beingapplied or, even if they are, may not have the search and negotiationtechniques or knowledge to avoid it. This could result in adverse effects forsome consumers, particularly those who are vulnerable e.g., due to age,income or financial capability, or those with behavioural biases who are lesslikely to negotiate or look for alternatives.67It should be noted that, in the context of its mandate, the Central Bank is not permittedto introduce prior notification or approval of proposed increases in premium rates,except as part of a general price control system.Byrne, S. and McCarthy, Y. (2020) 'Differential Pricing: The Economics andInternational Evidence', 2020(10), pp. 1 [Online]. Available at: Financial Stability NoteCentral Bank of IrelandPage 12

Differential Pricing ReviewCentral Bank of IrelandPage 133.3 Scope and Aims of the ReviewThe Review focussed specifically on the private car and home insurancemarkets. This is because of their importance to consumers and to societymore generally. These products lend themselves to the application ofdifferential pricing techniques because of the large volumes of customers,significant premiums and the levels of customer inertia associated withthem.Private car and home insurance products are two of the most commonlyheld insurance products in Ireland and offer consumers financial protectionin the event of accident or loss, playing an important role in providingconsumers with peace of mind. Private car insurance is a legal requirement,with minimum cover of third party required in order for an individual todrive a private car on public roads. While home insurance is not a legalrequirement, it is perceived by homeowners and renters to be an importantpurchase, and is often required by lending institutions in order to secure amortgage. These products account for a significant proportion of thepersonal insurance market.The Review examined the pricing practices of a number of the largest nonlife insurance providers operating in the private car and home insurancemarket.There are approximately 2.2 million private car insurance policies and 1.3million home insurance policies in the market. We estimate that the Reviewcovers more than 90% of these policies. 8The aims of the Review were to: Establish the impact of differential pricing on consumers; Assess the extent to which these pricing practices lead to outcomesconsistent with the Code; Identify the drivers of consumer behaviours including howconsumers engage with the insurance industry; and Assess the adequacy of the governance and oversight of differentialpricing.8Total market size estimate based on data from the 2019 Conduct of Business Returnssubmitted by insurers to the Central Bank.There areapproximately 2.2million private carinsurance policiesand 1.3 millionhome insurancepolicies in themarket. Weestimate that theReview covers morethan 90% of thesepolicies.

Differential Pricing Review3.4 A Multi-phased ApproachThe Review was conducted in three phases and the purpose of each phasewas to:Phase 1MarketAnalysis Establish the extent to which differential pricing is in operation in the Irishprivate car and home insurance markets and if it does exist, to establish howit is being carried out.Phase 2Quantitative Analysisand Consumer Insights Examine the degree of differential pricing among private car and homeinsurance policies through analysis of data provided by each firm in scope forthis Review. Conduct a consumer insights survey to gain insight on the wider populationof insurance customers.Phase 3Conclusions andRecommendations Informed by the findings in Phases 1 and 2 of the Review. Deliver a report or consultation on proposals for reform, as appropriate.3.5 Summary of Interim FindingsWe published our Interim Report in December 2020, providing a progressupdate on the Review and detailing some of our market analysis andpreliminary insights from the quantitative analysis and consumer-ledresearch. At the Interim Report stage, we had identified a number of pricingpractices that led to customers with a similar risk and cost of service payingdifferent premiums for reasons other than risk and cost of service. Wefound that, on average, renewing customers pay a higher amount relative tothe expected costs of their policy when compared to new businesscustomers.We also found that, on average, the longer a customer remains with theirinsurance provider, the higher the amount they pay in excess of thatrequired to cover the expected costs of the policy.Central Bank of IrelandPage 14

Differential Pricing ReviewThe Interim Report highlighted that, as a result of these practices, thoseconsumers who do not switch insurer on a regular basis or proactivelynegotiate a discount at renewal are often paying a higher premium relativeto the expected costs than those who do. The consumer research, whichtook the form of a survey (the Consumer Survey), identified that mostconsumers have a limited knowledge of how insurance pricing operates,which can discourage more active engagement. The Consumer Survey alsohighlighted a tendency on the part of some consumers to feel it is betterand easier to stay with their current insurance provider than switch.While the Interim Report noted that the practice of differential pricing iswidely used across a range of markets, and can bring benefits forconsumers, it also highlighted concerns that firms were not adequatelyconsidering the impact of differential pricing models on their customers.3.6 Work Completed Since the Interim ReportSince the publication of the Interim Report, we have completed furtheranalysis to better identify the drivers of differential pricing outcomes.We have also continued to supervise firms on the implementation of therequirements set out in our Dear CEO letter – which covered governanceand control criteria, culture and conduct and consideration of customerimpact. Our objective is to ensure that insurance providers understand theimpact of their pricing practices on their customers, and that they have fullyembedded consumer protection risk management frameworks to drivepositive behaviours.While this is the final report on the Review, it is not the end of our work ondifferential pricing. We will continue to develop our policy consideration ofproposed measures to address the risks identified in the Review andimplement them upon conclusion of our public consultation. We willcontinue to supervise firms to ensure they meet our requirements as setout in the Dear CEO letter. In addition, we will monitor developments in theprivate car and home insurance markets to better understand customerengagement in these markets and identify how it might be improved.Central Bank of IrelandPage 15

Differential Pricing ReviewCentral Bank of IrelandPage 164. MethodologyThis section summarises the various information sources and techniquesused to conduct our analysis. Supervisory judgement was applied to informour findings and proposals. The process involved appropriate peer reviewto ensure the rigour of the approach and to challenge judgements formed.The methodology is outlined in full in the Technical Annex to thisdocument.4.1 Detailed Methodology4.1.1 Market AnalysisThe Market Analysis phase of the Review involved analysis of more than2,000 documents submitted by firms in respect of their pricing practices. Aseries of 44 inspections across firms was also completed to obtain adetailed

for some groups of consumers in the private car and home insurance markets. Our analysis showed that long -term customers (those who stayed with the same insurer for nine years or more) pay , on average, 14% more on private car insurance and 32% more on home insurance than the equivalent customer renewing for the first t ime.

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