Consumers need more than another report on insurance pricing

What does a government do when it can’t decide what to do on a thorny issue? Commission a report. And when it still isn’t clear on what to do? Commission another report to discuss the findings of the original one.

It’s a tried and trusted approach, and one that we’ve seen many times before. Now it’s the turn of the insurance sector, and the Central Bank’s examination into whether or not dual pricing is so detrimental to the interests of consumers that it should be banned.

After all, since the Government pledged to remove the practice last June, we’ve had an initial report from the Central Bank of Ireland that found that dual pricing across the home and car insurance sectors was more common than expected. Subsequently, a letter was issued from the regulator to the chief executives of the various insurers companies asking them to “understand fully the impact of pricing practices” on their customers.

So far so benign. Then came Monday's interim report. A report so worthwhile that Davy stockbrokers managed to sum it up in a note to clients entitled: "No new findings in interim report".

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Perhaps the regulator is building up to its next report, scheduled for September 2021, with the Government indicating it will then take action, if necessary, by the end of 2021.

All this begs the question, if dual pricing is so damaging, why isn’t the Central Bank taking action now rather than waiting for another illuminating report, and another year?

To do so would be “previous”, Derville Rowland, director general of financial conduct at the Central Bank, told The Irish Times on Monday. Best, it would seem, to wait another year to do more research.

Mince pie analogy

Let’s say it’s coming up to Christmas and you head to your local supermarket, which you regularly frequent, for some mince pies. You ask how much they are and are surprised to be told they cost €5 for a box of four. But you accept the price and pay for them.

Imagine your surprise then, when you meet your friend on the way out – who lives far away and never goes to that supermarket – with two boxes of said mince pies who gleefully tells you they only paid €5 for the eight pies.

This is what dual pricing is about – charging two similar customers a different price for the same product. While it’s easy enough to get worked up about being overcharged for mince pies, we have become inured when it’s used on us by everyone from airlines to utility companies to insurers.

And there is no doubt that it is detrimental to a certain cohort of consumers – typically those who are reluctant to switch in the case of insurance – which is why the Government and opposition parties want to see the practice banned.

To be fair to the regulator, while Monday’s report may not have offered any substantial new information, it did offer a further insight into the impact it can have on consumers.

Waiting another year for another report is unlikely to change the outcome

It found that customers who stay with an insurer are subsidising lower-cost premiums for “new business”, and the longer a customer is with an insurer, the more they are likely to pay for their cover when compared with a new customer. Older people are particularly vulnerable to this loyalty premium, and are victims of “price walking”, whereby insurers increase premiums incrementally each year for existing customers come renewal time.

It’s enough of an issue to understand why the Government vowed to ban the practice in its action plan for the insurance sector last week in order to protect consumers, and enough for Sinn Féin to press ahead with plans to publish a Bill this week to ban the practice in the Irish market.

But not enough for the Central Bank to recommend taking action?

Stifled competition

Key to the Central Bank’s hesitancy to act is its fear that doing so could damage competition. As noted in the report, some consumers will get a better price by switching as dual pricing can foster “competition and innovation” and lower prices for new business, while the regulator’s director of consumer protection, Gráinne McEvoy, previously expressed concern that banning it could stifle competition.

But is competition really so great for consumers that it should trump regulators taking a firmer hand?

Some years ago, we were told that banks couldn’t be forced to bring mortgage rates down to European norms, because doing so would inhibit competition and discourage new entrants from the market.

How has that worked out? Well, Irish mortgage rates are still far higher than on the continent, while our one new entrant – Avant Money – only offers its best rates to those with loan-to-value ratios of 60 per cent or less, making it a niche competitor.

Moreover, for a country that has had such a dubious experience with competition in financial services – recall cut-throat competition in the run-up to the financial crisis as lenders aggressively chased market share resulting in the eventual near-collapse of the sector – it’s sometimes surprising to hear competition being talked about in such revered tones, as has been the case with the Central Bank of late.

Ultimately, a decision must be made. Dual pricing is either a problem, or it isn’t.

On the one hand, as the Central Bank has already discovered, it’s unfair to people who are either unwilling or unable to switch. On the other, again as the regulator has found, it helps those who are willing to shop around to get lower prices. Banning it will affect the latter but help the former and vice versa. What it comes down to then, is who the regulator thinks will be impacted most egregiously.

Waiting another year for another report is unlikely to change the outcome.