The Central Bank has said it is concerned about the shortcomings it has identified in the pricing practices used by some insurance companies, after completing the first phase of its investigation into the use of so-called “differential pricing” in the insurance market here.
The bank has found that some companies may not adequately consider the effect of their pricing practices on their consumers, potentially leading to poor customer outcomes.
An analysis carried out by the bank in recent months has found that while some companies claim they do not use differential pricing, the majority of companies do use it through different techniques.
It also found that some insurers lack governance and control arrangements.
These include insufficient evidence that boards of directors have properly considered or discussed the impact of their companies’ differential pricing practices on their customers.
The study, which included 33 inspections and meetings with 11 companies, also concluded that there was insufficient evidence of a customer-centric culture regarding pricing decisions and practices at some insurance companies.
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Differential or dual pricing is the practice of discriminating between customers for reasons other than the expected cost of claims and expenses.
Those using the practice, including insurers, use advanced data analytics techniques to build a profile of clients.
They can then use that information to, for example, charge customers who are less likely to shop around for renewal than other customers who are more likely to look for alternative quotes.
Secretary of State at the Treasury Department, Sean Fleming, said he would meet with the Central Bank later this week to discuss the review.
In addition, both Chancellor of the Exchequer Paschal Donohoe and myself will raise this issue with Insurance Ireland in the coming weeks as part of the government’s agreement on insurance reform.
“I expect insurance companies to respond positively to these concerns and work with the Central Bank. In addition, this should help progress the next stages of the assessment.”
In January, the Central Bank began a price review in the auto and home insurance markets.
This followed a complaint from Sinn Féin Finance spokesman Pearse Doherty that there was evidence that differential pricing was being used to benefit consumers.
Today, after the completion of the first phase, which included a market analysis of whether differential pricing was used and whether it is in line with the consumer code, the Central Bank has written to insurers, general managers and intermediaries to point out that immediate action is required on a number of fronts.
The regulator wants insurers to test their own pricing methods against the definition of differential pricing by the Central Bank.
“If a company believes that its pricing practices do not fall under the definition of differential pricing, the reason for doing so must be clearly documented and approved by the board of directors,” writes Derville Rowland, director general of financial behavior at the Central Bank. .
The companies are also being told to take responsibility at the board level for the impact of differential pricing on customers, “to ensure that a company’s pricing practices are well managed, controls are working effectively and that there is appropriate oversight, with roles and responsibilities for pricing activities clearly defined.”
The bank also wants insurers to provide a fully embedded consumer protection risk framework to manage risks and encourage positive behaviour.
“Insurance holders have a reasonable expectation that their insurance company will act fairly and fairly, and that they will act in the best interests of their customers,” said Grainne McEvoy, director of consumer protection at the Central Bank.
“This includes having a pricing policy that is fair and transparent and discloses important information to customers in an informative manner.”
“Failure to recognize and/or recognize the practice of price differentiation raises significant concerns about a company’s ability to assess this impact.”
The regulator is now seeking documented evidence that the issues it identified have been fully considered and that companies have a clear understanding of their tiered pricing practices and the impact they have on customers.
The bank also wants companies to demonstrate how their pricing practices comply with the Consumer Protection Code 2012.
“This confirms what we’ve said,” Pearse Doherty said.
“Insurers rob loyal customers, vulnerable customers and the practice should be banned.
“We had the industry in front of us in October telling us there’s nothing to see here. There’s a lot to see here. It’s banned in nearly 20 states across America and it should be banned here,” added Mr. Doherty to it.
Phase 2 of the analysis has now begun, with a quantitative analysis of more than 10 million individual policies and gathering insights from approximately 5,000 consumers through focus groups and surveys.
It will assess the degree of price differentiation between auto and home insurance and the bank plans to complete the full assessment next year.
“The primary purpose of this review is to ensure that customers are treated fairly, given the increasing sophistication of big data and modeling techniques within the insurance industry,” said Ms. McEvoy.
“While work on the assessment is underway, the issues we identified during our evidence-gathering phase are of such concern that we are now demanding action from relevant companies.”
The Central Bank has previously warned that it will consider banning dual pricing if its investigation finds that insurance companies that use it are not acting in the best interests of their customers.
The regulator cannot intervene on pricing or competition issues in the insurance market, but can intervene when the actions of regulated companies such as insurers threaten the consumer protection code.
Grainne McEvoy said it was far too early in the process to consider whether dual pricing should be banned.