Dual insurance pricing more widespread than admitted, regulator finds

The Central Bank has found that dual pricing across motor and home insurance policies is more common than coverage providers have admitted, at a time when the Government has committed to removing such practices from the Irish market.

The regulatory authority moved last November to start a review of dual, or differential, pricing in the insurance market, where customers with a similar risk profile are charged different premiums. The most common form is where insurers offer new customers better rates than those renewing their policies, who may end up paying a “loyalty premium” that penalises them for not shopping around.

While the Central Bank is not expected to complete the three-stage examination for another year, it has uncovered enough issues in the first phase to write to insurance providers, directing boards to have a clear understanding of the extent to which differential pricing is practised – and its effects on customers.

"While a number of firms maintain that they do not utilise differential pricing in their pricing practices, the Central Bank observed that the majority of 11 firms being reviewed do utilise differential pricing through various techniques," Derville Rowland, director-general of financial conduct at the Central Bank, said in a "dear CEO" letter sent to insurance firms this week.

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“Firms have a responsibility to understand fully the impact of pricing practices on their customers. Failure to recognise and/or acknowledge the practice of price differentiation raises significant concerns about a firm’s ability to assess this impact.”

‘Tangible evidence’

While the programme for government, agreed in June, pledged to work to “remove dual pricing” from the insurance market, the Central Bank’s director of consumer protection, Gráinne McEvoy, advocated on Wednesday for a “measured and proportional approach, based on actual tangible evidence”.

Ms McEvoy reiterated the Central Bank’s view that it is keen to avoid “unintended consequences” from any new regulations, such as stifling of competition.

“If you ban the practice, it might result in some industry firms exiting the market, reducing competition and choice for consumers,” she told The Irish Times, adding that the ability of households to secure a new customer discount by switching providers is a possible benefit of differential pricing.

While the Central Bank plans to complete an interim report by the end of this year, it is not yet clear whether it will contain recommendations. A final report is expected to be published in the third quarter of next year.

Seán Fleming, Minister of State with responsibility for Financial Services, Credit Unions and Insurance, said he "noted with concern" the initial Central Bank findings and would bring this up with Insurance Ireland in the coming weeks.

Sinn Féin finance spokesman Pearse Doherty said the finding has vindicated his claim the insurance industry was using the approach to prey on vulnerable customers.

Behavioural patterns

He said insurance companies were using big data – including information legitimately bought from marketing companies and online sites – to predict the behavioural patterns of existing customers, to ascertain if they would shop around at premium renewal time. He said that had led to premium levels being inflated for some customers who were more likely to stay with the companies.

“We have called on the Government to ban the practice of dual pricing. That is why I have drafted legislation that is currently before the Office of Parliamentary Legal Affairs, to actually bring this practice to an end.”

The UK's Financial Conduct Authority said last October in an interim report on its own investigation of the issue that six million consumers in the UK were being hit with loyalty penalties, totalling £1.2 billion (€1.3 billion), by not shopping around. Its final report, including recommendations, was originally due in the first quarter of this year but remains unpublished.

Last year, the Central Bank of Ireland introduced a new rule requiring motor insurers to prominently include details of the previous year’s premium on the renewal notices sent to customers, in order to encourage consumers to survey the market for value.