# Central Bank interim report on Differential Pricing of insurance



## Brendan Burgess (14 Dec 2020)

https://www.centralbank.ie/news/article/press-release-interim-report-of-differential-pricing-review-14-december-2020
		



Review finds the majority of insurance providers apply some form of differential pricing.
Completion of detailed analysis is essential to ensure full market perspective and evidence-based conclusions.
Central Bank will publish final report in 2021.
The Central Bank has today (14 December 2020) published the Interim Report on its Review of Differential Pricing Practices in the Irish Private Car and Home Insurance Markets. The report provides a progress update on the Review and outlines new insights from the Central Bank’s ongoing market analysis and consumer research.

As part of the second Phase of its Review, the Central Bank undertook extensive market analysis and in-depth research with consumers. This work is ongoing. Given that differential pricing can be associated with both benefits and costs for consumers, completion of this detailed analysis is essential in order to ensure a full market perspective, evidence-based conclusions, and appropriately calibrated regulatory interventions. Consideration of the likely costs and benefits of any potential solution to risks identified is also essential, with any potential market and consumer price effects given appropriate regard.

The Central Bank’s market analysis confirmed that the majority of insurance providers apply some form of differential pricing. It found:


A number of pricing practices were identified that led to customers with a similar risk and cost of service paying different premiums for reasons other than risk and cost of service. 
Dual pricing is evident across the private car and home insurance markets, where new and renewing customers are charged different premiums for reasons other than risk and cost of service.
There are significant differences between what different groups of customers pay relative to their expected cost – with those customers with the longest tenure paying the most.
Insurance providers failed to demonstrate consideration of how these pricing practices may impact certain groups of consumers differently, and the potential for certain consumer groups to be impacted more than others.
In addition to the market analysis, the Central Bank engaged in consumer research using in-depth interviews and focus groups to get a greater understanding of consumer attitudes towards and engagement with the private car and home insurance markets.
Initial observations from the consumer research include:


Consumers tend to show a clear preference for staying with an existing insurance provider. Often, consumers compare prices with other insurance providers to help to negotiate a better price with their current provider, rather than switching. 
The complexity of insurance means most consumers have a limited knowledge of how insurance operates. This leads to less involvement and a tendency to believe it is easier to stay with a current provider rather than switch.
Consumers are aware of the legal requirements associated with insurance. However, as consumers do not see it as a discretionary purchase, it is frequently considered in largely negative terms. This results in both a lack of trust and lack of interest. Private Car insurance is considered more involving, while there is a higher level of inertia towards home insurance.
This research is ongoing and, as with our other analysis, will help inform findings and recommendations.

Derville Rowland, Director General Financial Conduct, said: “We are undertaking a deep-rooted and forensic review of differential pricing practices in line with our mandate to ensure that the best interests of consumers are protected. This Interim Report summarises our initial observations, and these will help inform the next phases of our work.

“Along with our market analysis of the insurance providers’ practices, it was important that our Review included consumers’ voices and experiences, so we engaged directly with consumers to ensure that their voices inform our work. As differential pricing can be associated with some benefits for consumers, as well as costs, these insights will be essential to our overall analysis and help us determine upon completion of the Review the most effective measures to protect consumers.

“In the interim, our supervision of insurance providers will continue to ensure they implement the necessary requirements to address the concerns we set out in our recent industry letter.”

The Central Bank will conclude its Review and publish findings and recommendations in 2021.

*Notes*
The Central Bank has also published an [broken link removed].

On 9 September 2020, the Central Bank published a Dear CEO Letter setting out requirements to firms following the first phase of the review of differential pricing in the insurance sector.


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## Brendan Burgess (14 Dec 2020)

I wonder if the Central Bank will show the same concern about mortgage rates?


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## Protocol (14 Dec 2020)

I am curious...................price discrimination is common in many markets, and is normal.

The "dual pricing" or "differential pricing" - is that different from normal price discrimination?


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## Brendan Burgess (14 Dec 2020)

The FCA in the UK is consulting about banning it  https://www.fca.org.uk/publication/consultation/cp20-19.pdf

1.11 We are proposing a package of measures to improve competition and ensure firms offer fair value products in the future.

we propose rules to change the way firms price home and motor insurance. We propose that, when a firm offers a renewal price to a customer, that renewal offer price should be no greater than the equivalent new business price that the firm would offer a new customer. This would stop firms increasing prices for customers based on their tenure. This includes customers who may be unaware of existing pricing practices and are less likely to shop around or negotiate at renewal. We do not expect the same harm to recur in the future as firms would need to ensure they offer the equivalent new business price to existing customers.

• Auto-renewal (Chapter 5): where contracts are set to renew automatically each year, we have found that some firms do not make it easy for consumers to change their contract. So, we propose to require firms to offer a range of accessible and easy options for consumers who want to cancel auto-renewal on their contract. We propose to apply this remedy to all retail general insurance products, not just home and motor insurance.


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## Brendan Burgess (14 Dec 2020)

Protocol said:


> The "dual pricing" or "differential pricing" - is that different from normal price discrimination?



If I understand it correctly, dual pricing is offering new customers a different price from existing customers, but all existing customers are on the same price. 

Differential Pricing is where the renewal price offered is different for every existing customer e.g. the insurance companies have a higher quote the longer you are with them as you are less likely to switch. They also charge less to people who have a history of switching. 

Brendan


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## Brendan Burgess (14 Dec 2020)

I had not heard this term before, but it's a great description. 

*Price walking* is where *prices* for new customers are initially set below the *cost* to serve, and subsequently increased each year at renewal. There are several reasons why *price walking* occurs, such as fierce competition for new customers, some of whom will stay loyal.


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## NoRegretsCoyote (14 Dec 2020)

I know this is well intentioned but the activists on this just don't understand the basic economic theory.

Price discrimination is a feature of a competitive market! It's a way firms behave when they want to build market share 

When you see firms failing to compete for business it's a sign that the market is really stitched up!


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## Brendan Burgess (14 Dec 2020)

Hi Coyote

You are reading too many books on theory and ignoring the real world.

The real world is made up of simple people who do not and could never understand complex products. 

Lenders and insurers deliberately complicate products to paralyze people into inaction.

If it were a simple product like petrol, you might have a point.

Brendan


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## WolfeTone (14 Dec 2020)

NoRegretsCoyote said:


> Price discrimination is a feature of a competitive market!



Yes, but when the product is a compulsory purchase, such as car insurance (for those who have cars, of course), then it is a different matter. 

The health insurance sector is also area that needs looking at. For a simple soul like myself the options available from each competitor contain nothing more than a myriad of unnecessary criteria trying to determine which cover is most suitable, not only for myself, but for my family each of whom may have different needs.
Throw in the options from competitors, then its like trying to solve a large unattractive jigsaw puzzle.


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## NoRegretsCoyote (14 Dec 2020)

Brendan Burgess said:


> The real world is made up of simple people who do not and could never understand complex products.
> 
> Lenders and insurers deliberately complicate products to paralyze people into inaction.



Lots of markets have complex products and feature price discrimination. Neither is evidence of any kind of failure.

The Soviet Union had few, simple products, but no one tends to want to go back there.


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## jpd (14 Dec 2020)

If the market was really competitive, then someone would come in with a simple product and wipe all those hard to understand products off the table.

I think the current 3 suppliers have an interest in keeping it opaque and difficult to follow - maybe not quite a cartel but certainly not far from it. They only compete on the edges - a sort of pretend compete to keep the regulator at bay


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## Protocol (14 Dec 2020)

NoRegretsCoyote said:


> Price discrimination is a feature of a competitive market! It's a way firms behave when they want to build market share



To clarify, price discrimination does not occur under perfect competition.

Price discrimination occurs when the seller has some market power.


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## NoRegretsCoyote (14 Dec 2020)

Protocol said:


> To clarify, price discrimination does not occur under perfect competition.


That's a strawman.


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## ClubMan (15 Dec 2020)

The thread title should be "Central Bank discover the bleeding obvious". And most likely nothing will be done about it - and there are arguments both for and against doing something. Surely there are better uses of their time and resources? I was going to also say "skills" but I don't want my post to be taken as sarcasm.


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## Jim2007 (15 Dec 2020)

ClubMan said:


> The thread title should be "Central Bank discover the bleeding obvious". And most likely nothing will be done about it - and there are arguments both for and against doing something. Surely there are better uses of their time and resources? I was going to also say "skills" but I don't want my post to be taken as sarcasm.



Well nobody wants to address the underlying problem and of course when it does blow up, everyone will claim they never heard of it....


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## ClubMan (15 Dec 2020)

Jim2007 said:


> Well nobody wants to address the underlying problem and of course when it does blow up, everyone will claim they never heard of it....


What underlying problem?
Seems to me that they are just doing what many other service providers are doing - giving preferential deals to attract new customers and banking on inertia keeping them when they inevitably jack up the prices.
And to some extent the majority who don't shop around or complain help to perpetuate this situation.
It doesn't take the Central Bank investigation to figure this out.


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## NoRegretsCoyote (16 Dec 2020)

There is a nice piece in today's Irish Times:



> 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.


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## Jim2007 (16 Dec 2020)

ClubMan said:


> What underlying problem?



If the current conditions continue for a couple of more years we'll have to bail them out.  A well run insurance company has an expense ratio of about 105 - 107.  Meaning that they eventually payout all premiums plus 5% - 7%.   The entire business model is based on their ability to make a profit of the float and with interest rates they way the are, that is not happening.


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## Leo (16 Dec 2020)

Jim2007 said:


> A well run insurance company has an expense ratio of about 105 - 107. Meaning that they eventually payout all premiums plus 5% - 7%.



Aviva's 2019 results included a 14.3% return on equity and a 6% increase in profits to a record £3.2B


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## NoRegretsCoyote (16 Dec 2020)

Since the mid-80s there have been state rescues of PMPA, Quinn, and Setanta. RSA's Irish arm needed a big rescue from its UK parent.

As a taxpayer, I am quite happy with the sector being told to run itself along more prudential lines than in the past.


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## jpd (16 Dec 2020)

Isn't that what the regulator is supposed to ensure?


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