- First phase of review identifies weaknesses with some insurance pricing practices
- Boards and senior management must take responsibility for the impact of differential pricing practices on customers
- Next phase of review – quantitative analysis and consumer insight – now under way
The Central Bank of Ireland has concluded the first phase of its Review of Differential Pricing in the Motor and Home Insurance Markets and issued a letter to the insurance sector setting out its expectations in respect of the pricing of insurance policies.
The Review, which commenced in January 2020, is being conducted in three phases: (1) market analysis; (2) quantitative analysis and consumer insight; and (3) findings and recommendations.
The purpose of the market analysis phase was to establish the extent to which differential pricing is in use within these markets and, where it does exist, to determine how firms are utilising the practice and whether it is in line with the Consumer Protection Code. While it will be necessary to complete all phases before setting out conclusions from the Review, the Central Bank has identified a number of weaknesses in the market analysis phase that are of sufficient concern to communicate to insurance firms now.
The key issues observed include:
- Differential Pricing Practices: 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 firms do utilise differential pricing through various techniques. 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.
- Governance and Controls: It is not always evident that Boards of Directors have appropriately considered or discussed the impact of their firms’ differential pricing practices on their customers.
- Culture and Conduct: There is insufficient evidence of a customer focussed culture in respect of pricing decisions and practices. Firms must ensure that customers are at the centre of pricing decisions as part of the pricing process.
The Central Bank requires firms immediately to:
- Assess their own pricing methodologies against the Central Bank’s definition of differential pricing. If a firm does not consider its pricing practices to fall under the definition of differential pricing, the rationale for this should be clearly documented and agreed by the Board.
- Take responsibility at Board level for the impact of differential pricing on customers, to ensure a firm’s pricing practices are well-governed, controls operate effectively and appropriate oversight is in place, with roles and responsibilities for pricing activities clearly defined.
- Ensure that a fully embedded consumer protection risk framework is in place to manage conduct risk and drive positive behaviours. This framework should form an integral part of the pricing process to ensure fair treatment of consumers in accordance with the Consumer Protection Code 2012.
The Central Bank requires firms to have documented evidence that these issues have been fully considered by firms and that firms have a clear understanding of their differential pricing practices and their impact on consumers. Where any gaps or weaknesses have been identified, firms are required to develop and implement actions to address these and to mitigate any risk to consumers immediately.
Director of Consumer Protection, Grainne McEvoy said: “The primary objective of this Review is to ensure that customers are being treated fairly, given the increasing sophistication of big data and modelling techniques within the insurance industry. While work on the Review is ongoing, the issues we identified during our evidence-gathering phase are of sufficient concern that we are requiring action now from relevant firms. For this reason, we have written to firms instructing them to implement the Central Bank’s requirements with immediate effect.
“Policyholders have a reasonable expectation that their insurance firm will act with honesty and fairness, and that the will act in the best interests of their customers. This includes having in place a pricing policy that is fair, transparent and discloses material information to customers in a way that is informative. Failure to recognise and / or acknowledge the practice of price differentiation raises significant concerns about a firm’s ability to assess this impact. Where we identify practices or policies that are not consistent with the requirements or spirit of the Consumer Protection Code we will take appropriate action.”
Phase 2 of the Review – quantitative analysis and consumer insight – is now underway and extensive supervisory engagement with firms is continuing. The Central Bank will determine further actions based on the outcomes of this work.